Advantages and Disadvantages of a Minority Interest in Private Equity

Majority equity holders typically have more voting power on company boards than minority equity holders.

A minority interest in private equity is any equity amount that totals less than 50 percent of the total equity available to a private company. Companies use equity to expand business operations, purchase equipment and invest in other business opportunities. Those with minority equity interests technically own part of the company's equity and possess voting rights when the company votes on business matters.

Limited Voting Power

Individuals with a minority private equity interest typically have limited or no voting power in company affairs. Incorporated companies have board members with voting rights and board seats usually only given to those with majority interests in the company. If the company wants to vote on changes to employee pension plans, for example, the voice of someone with a minority private equity interest might not be heard because of the limited voting power. The majority interest has a greater ability to affect large company decisions.

Managerial Restrictions

If a company fails or suffers significant financial hardship, individuals with a minority interest in private equity feel less of the financial effects when compared to those with an equity majority. For instance, if a majority equity holder has $100,000 of equity in a company and a minority equity holder has $10,000 of equity in a company, a company bankruptcy will result in a smaller loss for the person with a minority private equity interest.

Less Ownership Liability

If a company fails or suffers significant financial hardship, individuals with a minority interest in private equity typically feel less of the financial effects when compared to those with an equity majority. For instance, if a majority equity holder has $100,000 of equity in a company and a minority equity holder has $10,000 of equity in a company, a company bankruptcy will result in a smaller loss for the person with a minority private equity interest.

Right to Offers

Those with a minority interest in private equity typically have the option to buy equity from individuals with a majority interest before it is offered to others outside of the company. The minority interest holder has the right, usually under some provision of his equity contract, to view the offer and decide if he wants to purchase the equity. This option benefits those with a minority interest in private equity if they want to increase their total equity and possibly become a majority equity holder.

References

• Davis and Gilbert LLP: Considerations for Minority Equity Interest Owners
• Principles of Accounting: Corporate Equity Accounting