Dilution
Also called: equity dilution
The fall in existing shareholders' percentage ownership when a company issues new shares.
When a company issues new shares, the total number of shares rises. Existing shareholders keep the same number of shares, but each now represents a smaller fraction of the company.
Dilution is not automatically bad. If the money raised makes the company more valuable by more than the dilution, existing owners can end up better off.
Example
A founder owns all 1,00,000 shares of a company. It issues 25,000 new shares to investors. The founder still has 1,00,000 shares, but now owns 1,00,000 ÷ 1,25,000 = 80% of the company instead of 100%.
Learn more in these lessons
- Why companies issue sharesWhy do companies sell shares to the public?
- Earnings per shareHow is earnings per share calculated?
- Share dilution and employee stock optionsHow do new shares and stock options affect existing shareholders?
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