What Is Equity? The Ownership Foundation
Equity represents fractional ownership in a company. When a business incorporates, it divides ownership into shares. Owning shares means owning a piece of the company’s value and any future profits or sale proceeds.
Multiple stakeholders typically hold equity in a startup. Founders own the initial shares when they incorporate the company. Investors buy shares to fund growth, taking ownership in exchange for capital. Employees receive shares or options as compensation, aligning their incentives with company success. Advisors sometimes receive equity in exchange for strategic guidance.
In Switzerland, startups typically incorporate as an AG (Aktiengesellschaft), which allows them to issue shares to multiple stakeholders. This corporate structure provides flexibility in how ownership is distributed and what rights different shareholders receive.
For investors, equity represents your financial stake and potential returns if the company succeeds. For employees, equity compensation creates alignment between your work and the company’s growth. For founders, equity is what you distribute — carefully — to build the company while maintaining meaningful ownership.
Actual Shares: Direct Ownership
When you own shares directly, you are a shareholder immediately. You appear on the company’s cap table, a document showing who owns what percentage of the company and what type of shares they hold. As a shareholder, you have specific rights: voting on major decisions, receiving dividends if the company declares them, and claiming proceeds if the company is liquidated or sold.
Startups issue two main types of shares, each serving different purposes and carrying different rights.
Common Shares
Common shares represent standard ownership. Founders and employees typically hold common shares. These shareholders vote at shareholder meetings and participate in the company’s success, but they stand last in line during liquidation. If the company is sold or goes bankrupt, common shareholders receive proceeds only after all creditors and preferred shareholders are paid.
Preferred Shares
Preferred shares are issued primarily to investors like venture capital firms, angel investors, or participants in equity crowdinvesting campaigns. These shares come with additional rights that protect investor capital.
The most important right is liquidation preference. Preferred shareholders typically receive their investment back (a 1x liquidation preference) before common shareholders receive anything. If a company raises CHF 5 million from investors and later sells for CHF 8 million, preferred shareholders get their CHF 5 million first. The remaining CHF 3 million is then distributed to common shareholders based on their ownership percentages.
Preferred shares often include protective provisions, which are veto rights on major decisions such as raising new funding, selling the company, or changing the corporate structure. Some preferred shares carry anti-dilution protection or dividend preferences, though these features vary by deal.
Why do investors demand preferred shares? Downside protection. If a startup fails or sells for less than the amount invested, preferred shareholders recover their capital first. Common shareholders bear more risk but also have unlimited upside potential if the company succeeds dramatically.
Swiss AGs can issue multiple share classes with different rights. Shareholder agreements govern the specific terms, voting rights, and liquidation mechanics for each class. Understanding whether you’re buying or receiving common or preferred shares is essential. The distinction fundamentally changes your risk-return profile.
Actual Shares: Direct Ownership
When you own shares directly, you are a shareholder immediately. You appear on the company’s cap table, a document showing who owns what percentage of the company and what type of shares they hold. As a shareholder, you have specific rights: voting on major decisions, receiving dividends if the company declares them, and claiming proceeds if the company is liquidated or sold.
Startups issue two main types of shares, each serving different purposes and carrying different rights.
Common Shares
Common shares represent standard ownership. Founders and employees typically hold common shares. These shareholders vote at shareholder meetings and participate in the company’s success, but they stand last in line during liquidation. If the company is sold or goes bankrupt, common shareholders receive proceeds only after all creditors and preferred shareholders are paid.
Preferred Shares
Preferred shares are issued primarily to investors like venture capital firms, angel investors, or participants in equity crowdinvesting campaigns. These shares come with additional rights that protect investor capital.
The most important right is liquidation preference. Preferred shareholders typically receive their investment back (a 1x liquidation preference) before common shareholders receive anything. If a company raises CHF 5 million from investors and later sells for CHF 8 million, preferred shareholders get their CHF 5 million first. The remaining CHF 3 million is then distributed to common shareholders based on their ownership percentages.
Preferred shares often include protective provisions, which are veto rights on major decisions such as raising new funding, selling the company, or changing the corporate structure. Some preferred shares carry anti-dilution protection or dividend preferences, though these features vary by deal.
Why do investors demand preferred shares? Downside protection. If a startup fails or sells for less than the amount invested, preferred shareholders recover their capital first. Common shareholders bear more risk but also have unlimited upside potential if the company succeeds dramatically.
Swiss AGs can issue multiple share classes with different rights. Shareholder agreements govern the specific terms, voting rights, and liquidation mechanics for each class. Understanding whether you’re buying or receiving common or preferred shares is essential. The distinction fundamentally changes your risk-return profile.
Stock Options: The Right to Buy, Not Ownership
A stock option is not a share. It is the right to buy shares at a predetermined price. You own nothing until you exercise the option by paying that price and converting it into actual shares.
The Strike Price
When a company grants you stock options, it sets a strike price (also called the exercise price). This is the price you will pay per share if you choose to exercise your options. The strike price is typically set at the company’s current fair market value and remains locked in, even if the company’s value increases dramatically.
The Profit Potential
Stock options create value when the company grows. Consider this example: You receive options with a CHF 10 strike price. Over several years, the company’s value increases and shares are now worth CHF 50. You exercise your options by paying CHF 10 per share and receive shares worth CHF 50. Your profit is CHF 40 per share (assuming you eventually sell the shares).
Vesting: Earning Your Options Over Time
Vesting means you must work for the company for a period of time before any options become exercisable. Vesting protects the company from granting equity to people who leave quickly. Options typically vest over four years with a one-year “cliff”. For example, after the first year 25 percent of your options may vest. Then the remaining options vest monthly or quarterly over the next three years. If you leave the company before the cliff, you give up all unvested options.
Exercising: Turning Options Into Shares
To convert options into shares, you must exercise them by paying the strike price. Exercising an option requires spending cash. If you have options to buy 1’000 shares at CHF 10 per share, exercising costs CHF 10’000. Only after paying this amount and exercising do you become an actual shareholder with voting rights and liquidation proceeds.
Critical Swiss Tax Consideration
In Switzerland, taxation occurs when you exercise options, not when they are granted. The taxable income is calculated as the difference between the fair market value of the shares at exercise and the strike price you pay. If you exercise options with a CHF 10 strike price when shares are valued at CHF 50, you owe income tax and social security contributions on CHF 40 per share even though you have not sold the shares or received any cash. This creates a potential cash flow challenge: you may owe taxes before you can sell shares to cover the tax bill. Note: this scenario may not apply to you. Consult a Swiss tax advisor for your specific situation.
For investors evaluating startup deals, understanding employee option pools matters. Most startups reserve 10 to 15 percent of equity for employee options. These reserves are often essential for attracting talent without needing to pay them immediately in cash.
RSUs: A Simpler Alternative
Restricted stock units (RSUs) represent a company’s promise to give you shares when they vest. Unlike options, RSUs have no strike price and require no cash payment to exercise. When RSUs vest, you automatically receive actual shares.
The key difference between RSUs and options is timing and taxation. RSUs are taxed when they vest, because you receive shares with immediate value at that moment. Options are taxed when you exercise, because that is when you pay to acquire shares.
RSUs are less common in early-stage Swiss startups. They are more typical in later-stage companies or large technology firms. Swiss startups usually grant options because they avoid creating an immediate tax burden for employees when grants are made. Options only trigger taxation when exercised, which may be years later.
Cap Tables and Dilution: Tracking Ownership
A capitalization table (cap table) is a document showing who owns what percentage of a company and what type of shares they hold. The cap table tracks all equity: common shares held by founders and employees, preferred shares held by investors, and stock options that are allocated to employees or reserved in an unallocated pool for future hires.
Cap tables are essential tools. Founders use them to manage equity distribution and track dilution across funding rounds. Investors analyze cap tables to understand ownership structure, identify who controls major decisions, and assess whether founders retain sufficient ownership to stay motivated.
Understanding Dilution
Dilution occurs when a company issues new shares, which reduces existing shareholders’ ownership percentages. Your number of shares stays the same, but you own a smaller slice of the total pie. Dilution commonly happens when a company raises new funding rounds, grants employee options, or issues advisor shares.
Dilution is not necessarily a bad thing. If new funding helps the company grow significantly, a smaller percentage of a much larger pie can be worth more than a larger percentage of a smaller pie. A founder who owns 40 percent of a CHF 10 million company (CHF 4 million value) may be better off owning 25 percent of a CHF 50 million company (CHF 12.5 million value) after a dilutive funding round.
For investors, understanding dilution helps you negotiate pro-rata rights, or the ability to invest additional capital in future rounds to maintain your ownership percentage. For founders, managing dilution across multiple funding rounds is critical to retaining control and maintaining meaningful ownership at exit.
Why These Distinctions Matter
Equity represents ownership, but it comes in different forms with different implications. Shares mean you own a piece of the company now. Options mean you have the right to own shares if you pay the strike price. Preferred shares protect investor downside with liquidation preferences and protective provisions. Common shares carry more risk but unlimited upside potential.
Understanding these distinctions is essential whether you are investing in Swiss startups through equity crowdinvesting platforms, receiving equity compensation as an employee, or founding a company and distributing ownership to investors and team members. These foundational concepts are the basis for everything else in startup finance: valuation negotiations, term sheet structures, portfolio construction, and exit strategies.
Platforms like CapiWell allow access to growth-stage equity crowdinvesting deals using these mechanisms. Understanding the fundamentals — what you are actually buying, what rights you receive, and how your ownership may change over time — helps you make informed decisions about which opportunities align with your investment goals and risk tolerance.
