Original Equity

Definition§

Original Equity is the amount of cash initially invested by the underlying owner or owners in a business or venture. This initial investment forms the foundational capital structure of the business and plays a crucial role in determining the owner’s percentage of ownership in the company. This term is specifically distinguished from sweat equity, which is the value added to a company through the effort and work of its founders and employees without cash investment, and capital calls, which are additional capital infusions requested from investors post the initial investment.

Examples§

1. Startup Company: If an entrepreneur starts a tech startup and invests $100,000 of their personal savings into the business, that $100,000 constitutes the original equity.
2. Real Estate Investment: If a real estate investor purchases a rental property and contributes $50,000 as a down payment from their funds, the $50,000 is considered the original equity in the property.
3. Partnership: In a business partnership where two partners each contribute $75,000 to start a retail business, the total original equity would be $150,000 shared equally between the partners.

Frequently Asked Questions§

Q1: How is original equity different from sweat equity?

• A1: Original equity refers to the cash or capital initially invested in a business, while sweat equity is the value of the work and effort invested by the founders or contributors without monetary compensation.

Q2: Can original equity change over time?

• A2: The original equity amount is fixed at the initial investment. However, the overall equity in the company can change through additional investments, profits, losses, or issuance of new shares.

Q3: What documentation is usually involved in recording original equity?

• A3: Original equity is typically recorded in the company’s financial statements, in incorporation documents, and detailed within equity agreements or partnership agreements.

Q4: How does original equity impact ownership percentage?

• A4: The amount of original equity directly influences the percentage of ownership each investor holds relative to the total value of the investment.

Q5: What happens to original equity in case of company liquidation?

• A5: In liquidation, claims on the company’s assets are settled in the order of creditors, preferred stockholders, and finally, common stockholders (those with original equity) get the remaining assets.

Related Terms with Definitions§

• Sweat Equity: The value created in a company through the efforts and hard work of its founders and employees, rather than cash investment.
• Capital Calls: Requests made by a firm to its investors to provide additional capital for the purpose of funding business operations or new projects after the initial investment.
• Ownership Stake: The portion of a company owned by an individual or entity, typically represented by equity shares.
• Initial Public Offering (IPO): The process by which a private company offers its shares to the public for the first time.
• Seed Funding: Early-stage funding provided to startups by investors to initiate business operations.

Online References§

1. Investopedia - Original Equity
2. Wikipedia - Equity (finance)
3. Corporate Finance Institute - Original Equity

Suggested Books for Further Studies§

1. “Equity Asset Valuation” by Jerald E. Pinto, Elaine Henry, Thomas R. Robinson, John D. Stowe.
2. “Valuation: Measuring and Managing the Value of Companies” by McKinsey & Company Inc., Tim Koller, Marc Goedhart, David Wessels.
3. “Private Equity: History, Governance, and Operations” by Harry Cendrowski, James P. Martin, Louis W. Petro, Adam A. Wadecki.

Fundamentals of Original Equity: Business Finance Basics Quiz§

Thank you for diving into the concept of original equity. We hope this comprehensive explanation and quiz further your understanding of foundational business finance terms. Keep exploring!