What is Equity?

Webster’s says equity is “justice or a claim of ownership.” Are they the same, different, mutually exclusive?

With respect to interest in something like stock in a startup, it is, sadly, most likely to be worthless. A quarter of all new small businesses are gone within two years and half are gone within five, according to data from the Department of Labor.

Yet without the crazies who gamble their existence on the hopes of a commercial promise, our economy is sunk. One-year-old firms create approximately one million jobs a year while the survivors (firms 10 years or older) create three times less, according to The Kauffman Institute.

At a time of still record unemployment (22 million underemployed) and nearly one million fewer jobs than existed before the recession, we have never needed entrepreneurs more. But the slog to make a company successful has never been harder given the shortage of capital. Fortunately, The JOBS Act of 2012 looks like it might offer some respite for the ambitious.

As of September 23, 2013, entrepreneurs will be able to advertise their fundraising via private placement offerings to all accredited investors. Less than 10% of accredited investors make alternative investments in startups, in part because of lack of awareness. Online platforms such as AngelList, Gust and EquityNet, are helping small businesses attract capital from these investors already and, by the end of September, the pool should theoretically broaden as more accredited investors learn about these early stage companies.

We hope that before the year is finished, all Americans will have the opportunity to say “yes” to an investment in startups. This is dependent upon when the SEC releases regulations for securities crowdfunding.

This brings us back to equity. Here to fore, it hasn’t been equal. Only the rich (the 1-2%, depending upon your math) who are definitionally wealthy (according to the SEC) could go there. Soon your everyday Jack and Jill will be able to do the same.

Some believe that we will be stealing from the poor. I think the SEC and the technology platforms that will offer these stocks will do an impressive job of cautioning Americans about the risks of such investments and limiting their exposure.

The vast majority of investment in startups is already provided by the unaccredited – friends and family. Speaking for myself, it is preferable to offer those in my circle something more than a wish and a prayer when asking for money— a piece of the action feels more honest. A process by which the terms are formalized, as envisioned with securities crowdfunding, is more transparent than taking checks without due diligence or formally recorded terms, as is typically the case.

What is also appealing is that those everyday people will be able to impact their own investments. They can buy the products or services, evangelize them to their friends and family and let a bigger market vet the business proposition. And a few will turn out to be big, which will democratize the financing of startups in ways we haven’t seen for decades.

With bonds providing almost zero interest, real estate still suffering and the stock market returning an average annual rate of 2.4% (January 2007 thru mid-August, 2013), it feels just and equitable to open the doors for all to play in the startup sandbox.

What do you think?

For more on securities crowdfunding, see what Terracycle Founder & CEO Tom Szaky has to say in this video. For more info and blogs, check out our crowdfunding page!

photo credit: Ahmad Nawawi via photopin cc