Equity: selling a slice

A company needs £100,000 to grow. It has two ways to get it. It can borrow — and you met that in the last item: a fixed claim. Borrow £100,000 at 8% and you owe £8,000 every year, in a good year and a terrible one, until the loan is repaid and the cost stops. The other way looks gentler. The company sells a slice of itself for £100,000. No loan. No interest. No date the money is due. It never has to pay the £100,000 back. That sounds like the better deal. Sometimes it is the most expensive money a company ever takes.

Selling a piece of the company

When a company sells equity, it sells ownership. The buyer hands over cash and gets a permanent share of the business — a slice of everything it owns and everything it will ever earn.

Say the company sells 25% of itself for £100,000. The buyer now owns a quarter of the company forever. That single deal also fixes a number people often miss: if a quarter is worth £100,000, the whole company is worth £400,000. (£100,000 ÷ 0.25 = £400,000.) The price of a slice sets the price of the whole.

Notice what changed and what didn’t. The £100,000 lands in the bank — real money to buy machines, hire people, grow. But unlike a loan, nothing has to come back out. There is no repayment. There is no interest. The investor cannot demand their money on a date. In a brutal year, equity asks for nothing.

The catch: a claim with no end

Here is what the investor bought instead of repayment: a permanent slice of all future profit, forever.

Go back to the very first item in this course — the owner is last in the queue and takes the leftover. The equity investor now stands in that same queue, beside the owner, at the back. They get nothing guaranteed. But whatever profit is left after everyone ahead is paid, a quarter of it is theirs. Every year. With no end date and no ceiling.

That’s the trade. Debt is a fixed, finite cost: heavy in a bad year, but capped, and it stops. Equity is the mirror image. It costs nothing in a bad year. But in a good year it costs more and more, and it never stops.

A worked example: the slice that never ends

Hold the deal fixed: the investor paid £100,000 for 25%. Now watch what that quarter is worth as the company’s profit changes.

Suppose the company settles into making £40,000 profit a year. The investor’s slice is 25% of that — £10,000 a year. At £10,000 a year, it takes them ten years to get their £100,000 back. Then year eleven arrives, and year twelve, and the investor keeps taking £10,000 every single year, forever. They’ve recovered what they paid, and the slice carries on paying.

Now suppose the company thrives and makes £200,000 profit a year. The same 25% slice is now worth £50,000 a year. The investor recovers their £100,000 in just two years — and then takes £50,000 a year, forever, for a deal that cost them £100,000 once.

Compare the loan. Borrowing the same £100,000 at 8% costs a fixed £8,000 a year. Once the £100,000 principal is paid off, the cost ends — the lender walks away with their interest and their money back, and that’s the whole bill. Equity has no such end. The lender’s cost is capped at 8% however well the company does. The investor’s cost rises with every good year and runs forever.

So the gentle-looking option — no repayment, no interest — is the one that can quietly become enormous. The better the company does, the more the original owner gives away. Selling a slice is free today and potentially very expensive later.

The fork at the heart of corporate finance

This is the central choice a company makes when it needs money, and it’s worth seeing it plainly as two shapes.

Borrow, and you keep all the upside. Every pound of profit beyond the interest is yours. But you carry a fixed burden that doesn’t care how the year went — and in a bad year that £8,000 still has to be found.

Sell a slice, and you carry no burden at all. There’s nothing to pay back, nothing owed in a bad year. But you’ve handed over part of the upside permanently. The slice you sold keeps taking its share long after the cash you raised is spent and forgotten.

Neither is the “smart” choice. They’re different bets. Debt suits a steady business confident it can cover the fixed cost. Equity suits a risky young business that can’t promise a fixed payment but might grow huge — where the founder would rather give away a slice than risk owing money it might not have. Most real companies use some of both, and the rest of this course is largely about getting that mix right.

Where you already stand in this

This isn’t a thing that happens only to founders. Equity is what your pension owns. A pension fund holds slices of hundreds of companies — those permanent claims on future profit, the same quarter-of-the-leftover that the investor bought above. When a company you’ve never heard of has a good year, a sliver of that leftover flows, eventually, toward someone’s retirement. The owners of companies are not a separate class somewhere; through pensions and savings, they are most working people, holding tiny pieces of the future profit of firms they’ll never visit. The queue from the first item runs all the way to your own old age — and you’re standing in it, near the back, waiting for the leftover, like every other owner.