Equity
From ForcaWiki, the simple encyclopedia
| In one sentence | A claim on what something is worth, either the traditional ownership stake left over after debts are paid, or, in independent film financing, a mix of a repayable loan and a share of the profits. |
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| Category | Finance |
| Related | Common Stock, Debt, Waterfall, Liabilities |
Think about your family's house. It might be worth a lot of money, but your family probably still owes money on it too, called a mortgage. The part that is genuinely, truly yours, what the house is worth minus what is still owed on it, is your equity in that house.
The traditional meaning
A business has equity too, and it works the same way. A company's equity is the portion of its assets that truly belongs to its owners, once all of its Liabilities, everything it still owes, are paid off. Equity is often described simply as assets minus liabilities: whatever value is left over for the owners after every debt is settled. Owning Common Stock in a company is one common way of owning a piece of its equity.
A special meaning in independent film financing
The word gets used a bit differently when financing an independent movie. Here, an equity investment usually blends two things together at once: a loan that gets repaid with an extra premium on top, similar to interest, plus a share of whatever profits the movie makes. That loan part of an equity investment is usually higher up in the movie's Waterfall, meaning it tends to get repaid before the pure profit-sharing part does.
This is different from a straightforward lender. A bank offering plain Debt just wants its fixed amount back plus interest. An equity investor in a movie is also hoping to share in the profits if the film is a hit, accepting more risk in exchange for more potential reward.
Fun facts
- In both meanings, equity is really about being some kind of owner, whether that means owning part of a whole company or owning a stake in one specific movie's future earnings.
- Exactly where equity sits in a movie's waterfall, how soon it gets repaid compared to other investors, is one of the most heavily negotiated parts of financing a film.
- A Financier choosing between debt and equity is really choosing between a safer, more predictable return and a riskier one with a bigger potential reward.