Share Dilution

Share Dilution refers to the reduction in existing Shareholder/">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 Shareholder/">Shareholders have over the company.

Examples:

  • When a startup raises Capital by issuing new Shares to investors, the ownership percentage of existing Shareholder/">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/">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 Shareholder/">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/">Shareholder owns 100,000 Shares (10%). After the issuance, the total Shares outstanding is 1.2 million, and the Shareholder/">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.