Wednesday, April 25, 2007

What is equity?

An economist would say that it's discounted value of future cash flows. That's not a very useful definition, especially for those of us whose businesses are made up of largely intangible assets.

To me, as you're building a business, you've got revenue, you've got expenses. Hopefully the former is greater than the latter. And then you've got this other thing. As you work--performing projects, establishing relationships, selling business, getting references, hiring employees, building a brand--an almost imperceptible momentum grows and accrues over time.

You get bigger. You get better. People know your business. Customers sign up again and again. Someday, that will be worth something and people will offer to pay you for that.

That's equity.

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(Picture from sammi babe via stock.xchng)