under NIDHI-SSP (Seed Support Program)
Up to ₹1Cr
Investment & Equity
Ownership in a company represented by shares. When an investor provides capital to a startup, they receive equity — a percentage of the company — in return. Equity can be common stock (typically held by founders and employees) or preferred stock (held by investors, with additional rights like liquidation preference and anti-dilution protection). The value of equity is determined by the company's valuation at each funding round. For founders, issuing equity means dilution — each round reduces their percentage ownership — but the goal is to grow the overall pie so that a smaller percentage is worth more in absolute terms.
Equity represents ownership in a company, divided into shares that are held by founders, investors, and employees. When a startup issues equity to an investor in exchange for capital, that investor becomes a partial owner of the company. Equity comes in different classes: common stock is typically held by founders and employees and carries standard voting rights, while preferred stock is held by investors and carries additional rights such as liquidation preference (the right to be paid first in an exit), anti-dilution protection, and board representation. The total equity of a company is divided into shares, and the percentage ownership of each shareholder is calculated as the number of shares they hold divided by the total outstanding shares. The value of each share is determined by the company's valuation at each funding round. For founders, issuing equity means dilution — each funding round reduces their percentage ownership. However, the objective is to grow the overall value of the company so that a smaller percentage of a much larger pie is worth more in absolute terms. A founder who owns 100% of a ₹1 crore company (worth ₹1 crore) is better off owning 20% of a ₹500 crore company (worth ₹100 crore).
Equity financing follows a structured lifecycle: 1. Incorporation: founders receive common stock, typically with vesting schedules. 2. ESOP pool: 10–20% of equity is set aside for employee stock options. 3. Seed round: investors receive equity (or instruments convertible to equity) at a seed-stage valuation. 4. Series A and beyond: preferred stock is issued with specific rights and preferences negotiated in the term sheet. 5. Exit: equity holders realise returns through an acquisition (where shares are bought by the acquirer) or IPO (where shares are sold to the public market). Throughout this lifecycle, the cap table — a spreadsheet tracking who owns what — becomes increasingly complex and must be carefully managed.
A founder starts with 1,00,000 shares (100% ownership). In a seed round, she issues 20,000 new shares to an investor for ₹50 lakh, bringing the total outstanding to 1,20,000 shares. Her ownership dilutes from 100% to 83.33%. In a Series A, the company issues 30,000 new shares to a VC for ₹5 crore, bringing the total to 1,50,000 shares. Her ownership dilutes further to 66.67%. However, the company's valuation has grown from ₹50 lakh (seed) to ₹25 crore (Series A post-money), so her stake is now worth ₹16.67 crore — significantly more than the ₹50 lakh it was worth at incorporation.
Equity is the currency of the startup world. Understanding how dilution, valuation, and share classes work is essential for every founder. The goal is not to maximise percentage ownership but to maximise the absolute value of your stake — a smaller piece of a much bigger company is the outcome every successful founder achieves.