Share Dilution

Share Dilution refers to the reduction in existing shareholders’ ownership percentages due to the issuance of additional shares by a company. When new shares are created, the total number of shares outstanding increases, which can lower the value of existing shares and decrease the control that current shareholders have over the company.

Examples:

• When a startup raises Capital by issuing new shares to investors, the ownership percentage of existing shareholders decreases. For instance, if a company has 1,000 shares and issues 500 new shares, the total shares outstanding becomes 1,500, reducing each existing Shareholder’s ownership percentage.
• If a company offers Stock Options to employees and exercises those options, it increases the number of shares outstanding, leading to dilution for existing shareholders.

Cases:

• Company A has 1 million shares outstanding. It decides to issue an additional 200,000 shares to fund a new project. Prior to the issuance, a shareholder owns 100,000 shares (10%). After the issuance, the total shares outstanding is 1.2 million, and the shareholder’s percentage drops to 8.33%.
• Company B grants stock options to its employees as part of a compensation package. When these options are exercised, new shares are issued, diluting the holdings of existing investors, who may see their share value decline as a result.