What Is an Equity Stake in a Business?

equity stake

Equity stake refers to the amount of ownership of a company owned by a person, organization or group of owners. It's usually expressed in percentage terms, with 100% equity stake indicating complete ownership. Owning an equity stake in a company gives an investor a measure of control over the business. The control is typically proportional to the percentage of ownership, with more than 50% equivalent to more or less absolute control. Equity stake and control can be diluted if more shares are issued. Some special types of shares can also give effective control to minority shareholders. To learn how equities can play a role in your investment portfolio, you may consider talking to a financial advisor.

Equity Stake Defined

Equity is the term used to describe how much a company is worth after subtracting debts and other liabilities. Buying ownership in a company is referred to as taking an equity stake.

When an investor buys shares of a publicly traded company, they are taking an equity stake. Private equity firms do the same when they invest in privately held companies in exchange for a portion of the ownership. Sometimes lenders may agree to accept an equity stake in return for forgiving part of a company's debts.

Otherwise, however, lending is distinct from ownership and having control is one example of that. Lenders normally have limited rights to influence a company's strategies, policies and operations. Having an equity stake, however, generally implies some ability to have input into business decisions.

How Equity Affects Ownership and Control

equity stake

The control that goes with owning equity can take different forms. In the case of a public company, owning equity comes with voting rights usually equal to the number of shares the equity holder owns. The larger the percentage of equity owned by a single investor, the larger their control. Investors with an equity stake in a public company can exercise their control when they vote on propositions put before shareholders at a public company's annual meeting. One share usually provides one vote.

These propositions often include electing members to the board, although other matters such as compensation plans may also be on the ballot. More detailed decisions, such as introducing new products, are not usually put before shareholders. So an equity stake in a public company gives control only over big-picture matters determined by the board.

Private equity stakeholders can have other arrangements. Often, private equity investors will require controlling ownership of a majority of shares before investing in a private company. Venture capitalists may have special powers such as the right to appoint board members.

Limits of Equity Stake Influence

In some cases, public companies can be set up so that owners of minority equity stakes have a controlling interest. This may be done through special classes of shares that have expanded voting rights.

Ford Motor Company is one example. The automaker has special Class B shares restricted to members of the Ford family. These shares together represent 40% of the voting rights, although they represent only 2% of the company's total outstanding stock.

While 40% is not outright majority ownership, when voting together the Class B owners can reliably impose their collective will on holders of common shares with no special voting rights. This makes the company effectively family-controlled, although the family's actual equity stake is a very small percentage.

Activist investors sometimes purchase significant equity stakes in public companies in order to influence company activities. They may be able to exert sizable influence, including getting board members elected, by having ownership stakes of less than 10% if they can convince other shareholders to go along.

Activists may then seek to have the company take specific actions, such as selling off divisions or putting the entire company up for sale or pursuing specific environmental or other objectives. Sometimes when this happens, as a defensive measure a company will issue additional shares in an attempt to dilute the activist equity stake and preserve independence. A poison pill is one defensive tactic employing this approach.

The Bottom Line

equity stake

Buying an equity stake in a company gives an investor some control over the business. Equity stakeholders can influence public company decision-making by casting votes at annual meetings, with each share normally representing one vote. For most shareholders of public companies, the amount of ownership control is very small because of the sheer number of shares, which may number in the hundreds of millions. Only large institutional shareholders can generally wield much influence over most public companies. Private equity firms may enjoy majority control and essentially unhampered ability to influence the companies they choose for investing.

Tips for Investing
  • Equity investments can play an important role in your retirement planning and overall investment strategy and a financial advisor can help you decide where to put your money. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
  • Equities represent only one asset class investors can consider for their portfolios. SmartAsset's Asset Allocation Calculator can help you decide what percentage of your funds to devote to stocks, bonds, cash and other asset classes.

Photo credit: ©iStock.com/Charday Penn, ©iStock.com/courtneyk, ©iStock.com/Pattanaphong Khuankaew

The post What Is an Equity Stake in a Business? appeared first on SmartAsset Blog.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for the TradeTalks newsletter to receive your weekly dose of trading news, trends and education. Delivered Wednesdays.