No problem. There is math, so follow closely:
A startup has 100 shares to split (or 1000, or 1,000,000; doesn`t matter) - i.e. 100% is all there is. No more, no less. A share is simply a % of owner`s equity. It shows up on the right-hand side of a balance sheet. It is, incidentally, cleverly hidden under a big heading of OWNER`S EQUITY. It is generally also underlined.
IF they start handing out equity from day one, they will eventually run out. AND, if the company is ultimately successful, guess what? They effectively ended up paying some schmo programmer/secretary/ - not you personally, of course - whomever, a chunk of their company for what at the time could have been next to nothing. Ergo:
Need a third person. Give them equity (company is valueless at this point for market capitalization, valuation, cashflow, you name it. They give away 5% for a third employee. Done deal.
SOME DAY IN THE FUTURE
Business is great! The company is now worth 1 times earnings (low multiple) and they are doing $10 million in sales.
That initial 5% allocation is then worth $500,000. Plus, Ms. 3rd employee, who may never rise above the function with which she was hired, controls 5% of this enterprise.
I`m no math whiz, but $500,000 for an employee seems like a lot of money for a bridge loan, which basically what this situation is presented as being.
Your story does not make sense. If you held equity, and the firm was acquired, then why were your shares not converted at acquisition?
Thus ends this edition of `Why Equity is Expensive`.
In our next lesson, stay tuned for `Why Water is Wet`.