If you own ten per cent of the equity in a business, what does this actually mean?

Question

Does this mean you will get per cent of the annual profit? if not, what does this actually mean?

(been watching Dragons Den lol)

Sorry i meant to ask:

"Does this mean you will get TEN per cent of the annual profit? if not, what does this actually mean?"

Answer 1

The question is a little more complicated than it might first seem, I think. In actuality you do own 10% of the profits of the company. But unless you happen to be a member of the board of directors, you have virtually no say in what is to be done with those profits. However, with a 10% ownership you might very well have some say in how the company is to be run. If you were to have 50.00001% of the ownership of the company, then you would have a great deal to say. In fact you would have control of the company. Many times control can be accomplished with less than that amount, perhaps as little as 25% if you can get backing of institutional investors that might also control large blocks of stock.

Unfortunately, today many managements are very much intrenched in companies. They own very little share of the company, but by hand picking the board of directors they dictated to the actual owners of the company and reap all the profits for themselves and give the shaft to the owners. One of the situations that allows this to happen is the large amount of ownership controlled by institutional investors, who do not seem to care if management is ruining the company or not. There however was a recent situation where management at HP got the boot when the institutional investors got fed up with how poorly management was doing. Sort of the exception that proves the rule.

Answer 2

The equity is the money invested in the company to start it up. This is divided into shares. If you own 10% of the equity, then you own 10% of the company and 10% of any dividends. These may not be paid, however. The directors may decide to pass over the dividend in order to use the cash to expand the company, especially in the early days of the business.

Answer 3

It means whatevey your contract says it means.

In general, it means you should get 10% of the money when and if the business ever sells all its assets.