Equity is a fundamental concept in business ownership. In a corporation, ownership is divided into shares of stock. When a startup is founded, the founders typically hold all the initial equity. As the company grows and seeks external funding, it sells these shares to investors. Each share represents a fractional ownership of the company. The total value of all outstanding shares is the company's market capitalization. Founders must carefully consider how much equity they are willing to give up for funding, as it directly impacts their control and future financial returns.

Valuation is a complex process that can be approached using several methods. For early-stage startups, valuation is often more art than science, heavily influenced by market conditions, growth potential, team quality, and intellectual property. Common methods include discounted cash flow (DCF), comparable company analysis (CCA), and precedent transactions. For pre-revenue startups, valuation is often based on multiples of projected revenue or industry benchmarks. A higher valuation means you give away less equity for the same amount of investment, which is generally more favorable for founders.

Dilution is an inevitable part of startup growth. When you raise capital, you sell equity, thus diluting existing shareholders. Similarly, granting stock options to employees or advisors also leads to dilution. The goal is to ensure that the increase in the company's value (driven by the new capital or motivated employees) outpaces the percentage of ownership given away. Founders must balance the need for funding and talent with the desire to retain as much equity as possible.