What is 'Equity Participation'

Equity participation refers to the ownership of shares in a company or property. Equity participation may involve the purchase of shares through options or by allowing partial ownership in exchange for financing. The greater the equity participation rate, the higher the percentage of shares owned by stakeholders. Allowing stakeholders to own shares ties the stakeholders' success with that of the company or real estate investment. In this case, a more profitable company will provide stakeholders with greater gains.

BREAKING DOWN 'Equity Participation'

Equity participation is used in many investments for two primary reasons. First, it is used to tie the financial rewards of executives to the fate of the company, increasing the likelihood that executives will make decisions that will improve company profitability. This type of compensation may be delayed, reducing the possibility of executives making short-term decisions to boost the share price. Workers, not just executives, can also be offered equity by companies as a form of employee retention and work incentive. This typically is in addition to base salary and bonuses they receive.

Effects of Equity Participation

As with executives who receive equity, the intent is to encourage employees to contribute their best efforts towards the long-term growth and prosperity of the organization. The equity held by executives and employees can come with additional stipulations regarding how the shares may be converted, sold, or transferred. Different types of equity, such as options, reserve, phantoms stock, preferred stock, or common stock, may be issued if a company wants to create varied layers to the equity participation program offered to employees. Even with those potential benefits, the way a company makes equity participation available can have unintended consequences, such as exposing employees to new tax liabilities.

The second reason for equity participation is it can be used by companies operating in emerging economies in which local governments want to reap the rewards brought on by development. Moreover, share ownership also allows local governments a say in company decisions. Residents of a municipality might also be offered equity stakes in the development or redevelopment of their hometown.

For instance, after New Orleans was devastated by Hurricane Katrina and the ensuing floods, there were proposals to grant displaced residents equity in the revenue generated from the redevelopment of their neighborhoods. The intent was to give people who lost their homes and livelihood a chance to reap the benefits of new business and wealth that would come to the city thanks to the rebuilding efforts. This would also make those residents more participatory in the decision-making process for the revitalization of their areas.

RELATED TERMS
  1. Equity

    Equity is the value of an asset less the value of all liabilities ...
  2. Stakeholder

    A stakeholder is a party with an interest in an enterprise or ...
  3. Equity Fund

    An equity fund is a type of fund that uses investors' capital ...
  4. Authorized Participant

    Authorized participants are one of the major parties at the center ...
  5. Key Employee

    A key employee is a staffer who is a stakeholder with a decision-making ...
  6. Private Equity

    Private equity is a non-publicly traded source of capital from ...
Related Articles
  1. Investing

    Employee Stock Options (ESO)

    Employee stock options are a form of equity compensation granted by companies to their employees and executives.
  2. Personal Finance

    Equity vs. Salary: What You Need To Know (FB, GOOG)

    Equity payments are common at startup companies. Equity offers potential for a big payout but is also much riskier than a salary payment.
  3. Investing

    Charles Schwab: Employees Afraid to Make Mistakes Exercising Equity Compensation

    A new survey by Charles Schwab shows that employees like equity compensation but tend to freeze when it comes to using it.
  4. Investing

    How to Invest in Private Equity

    Private equity might be a pricey investment, but the payoff could be big. Here's why and where you should invest in private equity.
  5. Investing

    Equity Multiplier

    The equity multiplier is a straightforward ratio used to measure a company’s financial leverage. The ratio is calculated by dividing total assets by total equity.
  6. Financial Advisor

    Beware Of Company Stock In Qualified Plans

    While this strategy does have a few advantages, it can also pose some substantial risks to employees.
  7. Managing Wealth

    Raises or Bonuses Better for Small Business Staff?

    Weigh the pros and cons of each and strike the right balance to retain a top-tier staff and a healthy bottom line for your business.
  8. Managing Wealth

    How To Become A Private Equity Associate

    With the right planning, second- and third-year investment banking analysts can graduate to an associate position at a private equity firm.
  9. Investing

    Equity Stripping Leaves Creditors Empty-Handed

    Add additional debt to your real estate assets to keep the creditors at bay. Learn about debt- and corporate-entity-based strategies for protecting your assets.
RELATED FAQS
  1. How Is Equity and Shareholders' Equity Different?

    A company's equity typically refers to the ownership of a public company. Shareholders' equity is the difference between ... Read Answer >>
  2. What is the difference between a shareholder and a stakeholder?

    Shareholders are always stakeholders in a corporation, but stakeholders are not always shareholders. Read Answer >>
  3. Why would a company use a form of long-term debt to capitalize operations versus ...

    Learn about the different consequences of using long-term debt versus equity to raise capital for business activity, and ... Read Answer >>
Trading Center