Equity & Ownership

Equity versus Profit Share

Understand the difference between equity (owning the business and all its value) and a profit share (a claim on some of its profits), because a profit share captures none of the appreciation or sale that equity does.

  • Beginner
  • 14 min total
  • 13 chapters

What decision this helps you make: Whether a stake is true ownership (equity) or a claim on profits (a profit share), and which to give or get for a given goal.

What this topic is

Equity is ownership of the business itself: its appreciation, sale proceeds, and profits by virtue of ownership. A profit share is a right to a portion of the business's profits, without owning the business.

Why it matters

A profit share captures a slice of profits while the business operates, but gets nothing from a sale, doesn't benefit from appreciation, and usually ends with the arrangement. Equity owns the business and captures its full value: profits, appreciation, and the sale.

Who should learn it

Anyone compensating partners or employees, or evaluating what a stake really is.

What you will understand

  • Understand equity (ownership) vs. a profit share (a claim on profits)
  • See what a profit share misses: appreciation and a sale
  • Know why profit shares align people with profitability but aren't ownership
  • Never confuse sharing in profits with owning the business

Prerequisites

Common misconception

"Giving someone a share of the profits is basically making them a part-owner." Not so: a profit share is a claim on money the business generates, not ownership. Equity owns the business itself, its appreciation and the proceeds of a sale, while a profit share captures only a slice of operating profits, gets nothing from a sale, doesn't benefit from appreciation, and usually ends with the arrangement. Giving a profit share is very different from giving equity, which is a permanent claim on the whole enterprise and its sale.