Key Takeaways

  • An equity offer represents a share of ownership in a business, which may include common stock, preferred shares, or employee stock options.
  • Companies issue equity offers to raise capital, reward employees, or attract investors.
  • Different equity types—such as restricted stock units (RSUs), stock options, and convertible notes—serve specific strategic or compensation purposes.
  • Evaluating an equity offer requires understanding valuation, vesting schedules, and potential dilution.
  • Shareholder equity accounts like retained earnings, contributed surplus, and treasury stock affect overall ownership value.
  • Startups often use equity offers as part of compensation, helping align employee incentives with company performance.
  • You can find an attorney on UpCounsel if you need legal guidance in evaluating or structuring an equity offer for your business.

Types of equity are different forms of shares or ownership available in a company. Some corporations will offer differing levels of equity to attract investors with wallets of all shapes and sizes. 

What Is Equity?

Equity is the ownership an investor has in a corporation, also called their share. The income of a corporation is divided into shares after any company financial obligations or debts have been paid off. 

The price of a share or equity depends on a few different factors regarding the business and its income. This price is the value determined for a share by considering the earning potential of the business. The factors considered when determining a company's earning potential include:

  • The state of the economy in the corporation's particular industry.
  • The state of the general economy on a national and international level (depending on the size and reach of the corporation).
  • Projected earnings.
  • Projected growth.
  • Development stage.
  • Financial ratio analysis.

When a corporation is in the startup phase, the money given by shareholders and owners to get things up and running and to afford ongoing business operations is also called equity. 

The total equity of a limited liability company (LLCs) refers to the value of the assets left over once any liabilities are paid and recorded. LLCs can determine their equity, also called net worth, by subtracting their liabilities from their assets. 

There are a few different types of equity including:

  • Common stock
  • Preferred shares
  • Contributed surplus
  • Retained earnings
  • Treasury stock

Understanding an Equity Offer

An equity offer refers to the opportunity for an individual or investor to obtain ownership interest in a company, typically through purchasing or receiving shares of stock. Businesses issue equity offers to raise capital for expansion, repay debt, or fund new projects.

There are two main contexts for equity offers:

  1. Investor Equity Offerings – When companies sell stock to the public or private investors. This includes initial public offerings (IPOs), follow-on offerings, or private placements.
  2. Employee Equity Offers – When companies grant equity as part of a compensation package, often through stock options, restricted stock units (RSUs), or employee stock purchase plans (ESPPs).

An equity offer provides a way for investors and employees to participate directly in a company’s growth and profits. However, it also involves risks—if the business underperforms, the equity’s value may decline.

Other Common Forms of Equity

Equity can take several other forms beyond common stock and preferred shares, particularly in startups and growing businesses. These include:

  • Restricted Stock: Shares awarded to employees that are subject to vesting conditions based on performance or time.
  • Stock Options: Rights granted to employees or investors to purchase stock at a predetermined price after a vesting period.
  • Founder’s Equity: Ownership stakes given to early founders in exchange for their initial contributions, typically involving greater risk but larger reward potential.
  • Equity Compensation: Startups often offer equity (like stock options or restricted stock units) as part of compensation packages to attract and retain top talent.

These types of equity are crucial for motivating employees, raising capital, and aligning interests between shareholders and company management​​.

Types of Equity Offers in Businesses

Companies can extend equity offers through several mechanisms depending on their goals and corporate stage:

  • Private Equity Offerings: Used by privately held businesses seeking funds from venture capitalists or accredited investors without going public.
  • Public Equity Offerings: Common in larger corporations through IPOs or follow-on offerings, allowing public trading of shares.
  • Direct Listings: Enable companies to list shares on a public exchange without raising new capital, offering liquidity for existing shareholders.
  • Rights Offerings: Give existing shareholders the right to purchase additional shares before the company offers them to new investors.
  • Employee Equity Offers: Provide ownership incentives to employees in the form of RSUs, stock options, or performance-based shares.

Each type of equity offer comes with its own regulatory requirements, tax implications, and shareholder rights, making legal and financial consultation essential.

Common Stock

The ownership of a corporation is represented by common stock (also called common shares). This type of equity affords its holders the right to vote and a right to certain company assets. Common stock value is determined by multiplying the par value of the stock by the total number of outstanding shares. 

The regular income of a corporation is distributed to the common shareholders through capital gains and dividends paid out share by share. 

Common stock owners have quite a few responsibilities within the company including:

  • Board elections
  • Officer appointments
  • Auditor selections
  • Determining dividend policies
  • General corporate governing

Investors who own common stock are meant to have a somewhat controlling hand in the overall direction of the company. If someone wants to be involved in a company only at a financial level, common stock isn't a good fit for them. 

Common stockholders accrue greater capital gains than preferred shareholders as the market price of the company's stock increases. 

If a corporation is dissolved, common shareholders have some important rights like limited liability protection from creditors, residual claims to income and assets once other claims and debts are paid off. 

Evaluating Your Equity Offer

When receiving or purchasing an equity offer, it’s important to analyze several factors to understand its real value and potential upside:

  1. Valuation and Share Price: Determine how much your equity is worth at the time of the offer. Founders and employees should understand the company’s valuation and how new equity might dilute ownership.
  2. Vesting Schedule: Many equity offers include vesting terms, meaning ownership is earned over time—often a four-year vesting period with a one-year cliff.
  3. Exercise Price (for Options): The price you’ll pay to purchase shares, which affects your profit if the company’s value rises.
  4. Liquidity Options: Consider when and how shares can be sold or transferred—especially in private companies, which may have limited exit opportunities.
  5. Dilution Risk: Future fundraising rounds or stock grants may reduce your percentage ownership.
  6. Tax Considerations: Different equity forms (e.g., ISO vs. NSO stock options) have unique tax treatments and potential liabilities.

Evaluating an equity offer like an investor ensures that employees and early investors make informed decisions about their compensation or investment potential.

Preferred Shares

Preferred shares are offered to investors by companies with defined dividends and common stockholder shares. 

If the operations of a company are wound up, the owners of preferred stock will have any obligations the company owes paid to them. On the occasion that dividends are suspended from payment to stockholders, preferred stock dividends are usually paid out before common stock. 

Sometimes corporations will add different features to their stockholder agreements for preferred stock to make it more appealing to investors. Things like convertibility and call provisions are commonly included to make the preferred stock attractive. Many investors like when preferred shares can be converted into common shares. 

Preferred stockholders do not usually have any rights or responsibilities within the company operations. They don't vote in officer or board elections. The dividends for preferred stock accumulate throughout the years if they aren't paid on a yearly basis. If an investor owns a preferred dividend, they are guaranteed dividends. 

Participating Preferred Shares

A specialized type of preferred stock, participating preferred shares allow holders not only to receive their fixed dividends and investment return but also to participate in any remaining proceeds distributed to common shareholders after liquidation preferences are satisfied. This dual benefit makes them highly attractive to investors, especially in high-growth companies​.

Contributed Surplus

Money that is paid by investors for stock that goes over the par value of the shares is called contributed surplus or additional paid-in capital. This amount can change as the company experiences gains and losses from selling shares and other types of income or financial instruments.

Other Types of Equity Accounts

In addition to contributed surplus, businesses maintain other equity-related accounts that impact how ownership is tracked and reported, including:

  • Owner’s Capital: Contributions made directly by owners into the business. Common in sole proprietorships and partnerships.
  • Owner’s Withdrawals (or Draws): Money taken out of the business by an owner for personal use, reducing total equity.
  • Accumulated Other Comprehensive Income (AOCI): Gains or losses not included in net income, such as foreign currency adjustments or unrealized gains/losses on securities​.

Tracking these accounts accurately ensures a clear picture of a business’s financial health and owner interests.

How Equity Offers Affect Company Accounts

Equity offers impact a company’s balance sheet and ownership structure by influencing core equity accounts such as:

  • Contributed Capital: Increases when new shares are sold through an equity offering.
  • Additional Paid-In Capital: Reflects the amount investors pay over the stock’s par value, often growing with each equity round.
  • Retained Earnings: May be reinvested into the business or distributed as dividends depending on profitability.
  • Treasury Stock: When companies repurchase shares, it reduces outstanding equity but can increase share value by consolidating ownership.

Understanding how these accounts interact helps stakeholders interpret financial statements and evaluate how new equity offers may alter ownership percentages or control rights.

Retained Earnings

Any company income that is not paid out to stockholders as dividends is called retained earnings. Basically, anything a company can save at the end of a year after all financial obligations are met, they can use to invest or save for future needs. 

Treasury Stock

If a company chooses to buy back any stock from common stockholders, it is deducted from the total equity of the business and called treasury stock. 

Common Mistakes When Assessing Equity Offers

Even experienced professionals can misinterpret the details of an equity offer. Common pitfalls include:

  • Ignoring Vesting Terms: Assuming full ownership immediately without reviewing vesting schedules.
  • Overlooking Dilution: Failing to account for how future funding rounds can reduce equity value.
  • Misjudging Tax Impacts: Not planning for taxes owed upon exercising options or selling shares.
  • Neglecting Exit Strategies: Accepting equity in a company with no clear path to liquidity.
  • Confusing Equity Types: Treating all stock offers as equal when, in fact, preferred shares and common shares carry different rights and risks.

To make sound decisions, both investors and employees should seek legal or financial advice before accepting or issuing any equity offer.

Frequently Asked Questions

  1. What is an equity offer?
    An equity offer gives individuals or investors the opportunity to purchase or receive ownership in a company, either through shares or stock options.
  2. How do startups use equity offers?
    Startups use equity offers to attract employees, raise capital from investors, and align incentives with company growth.
  3. What should I look for in an equity offer?
    Review the vesting schedule, valuation, exercise price, and tax implications to assess both risks and potential rewards.
  4. Are equity offers taxable?
    Yes. Taxes depend on the type of equity—ISOs, NSOs, or RSUs have different tax treatments at grant, exercise, or sale.
  5. How can I evaluate the real value of my equity offer?
    Consider company valuation, potential dilution, and liquidity opportunities. Consulting an experienced attorney or financial advisor can help clarify your offer’s worth.

If you need help with equity offer, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.