Shares & Stocks
Shares (or stocks) represent ownership in a company. When a business is divided into shares, each share is a fractional piece of ownership. Public companies sell shares on stock exchanges, while private companies issue shares that are typically held by founders, employees, and investors.
Equity
Equity refers to the total ownership value in a company. If a company is worth £10 million and an individual owns 10% of it, their equity stake is worth £1 million (on paper).
Vesting
Vesting is a process where ownership rights to shares (typically granted to employees or founders) are earned over time. A common structure is a 4-year vesting schedule with a 1-year cliff, meaning:
- No shares are owned if the person leaves before the first year (cliff).
- After the first year, 25% of the shares vest.
- The remaining shares vest monthly or quarterly over the next three years.
This encourages long-term commitment.
Phantom Shares (Phantom Stock)
These are not real shares but rather a promise of a financial payout that mimics stock ownership. They allow participants to benefit from a company’s success (e.g., via cash bonuses tied to share value) without actually owning equity. This is useful in cases where actual stock issuance is complex or undesirable.
Options vs. RSUs
- Stock Options: The right to buy shares at a set price (the "strike price"). If the company grows, the difference between the strike price and the current valuation is the profit.
- Restricted Stock Units (RSUs): Actual shares granted outright after vesting, usually with no purchase requirement. RSUs are common in public companies.
Dilution
When a company raises more investment, new shares are created, which dilutes (reduces) the percentage ownership of existing shareholders. If someone owns 10% of a company and new shares are issued, their percentage decreases unless they purchase more shares.
Exit Strategies
- Acquisition: The company is bought by another business. Shareholders get paid based on their equity.
- IPO (Initial Public Offering): The company goes public, allowing shareholders to sell shares on the open market.
- Secondary Sales: Private sales of shares before an IPO or acquisition, usually to investors or other employees.