Dilution

What It Means

Dilution refers to a situation where an equity investor’s ownership share of a company decreases as the company issues new stocks. Dilution is very common whenever a company raises money in exchange for equity. The company issues new shares and gives them to the new investor in exchange for the investment capital. Because the total number of shares has increased, the proportion of shares owned by existing equity holders, which hasn’t changed, decreases as a percentage of the total number of shares.

Why It’s Important

While Dilution is common, it doesn’t always happen in a fair and equitable manner. Some investors push for anti-dilution provisions, which prevent them from becoming diluted in a future fundraising event. This is great for the investors that have the anti-dilution provisions, as they would receive additional shares at the same time as the new investor to keep them at their original ownership percentage. However, those types of provisions actually make the dilution worse for other investors and owners of the company. After all, the equity share given to the new investors has to come from somewhere.

Instead of focusing on keeping a constant share of equity, investors should be focused on things that increase the value of equity for all owners.

Related Terms

Return to List of Terms

Articles

Follow the Money: Sources of Capital Used to Buy a Business

In this article, we will explore some of the more common sources of funding used to purchase a business, along with a few brief but important considerations for both buyers and sellers.

[Updated] Should the election results affect when you sell your business?

[Updated 2023] Governmental control changes hands every few years here in the US, but should shifts in the political winds affect the timing of a sale? The democratic party party seized control of the white house and won a narrow majority in both legislative houses in the 2020 election. We’ll explore a few ways that the election results might affect business owners contemplating an exit, for better and for worse.

What is an “add-back” expense anyway?

Expense add-backs are a common adjustment made to the P&L of companies that are positioned for sale. They are intended to represent expenses that would not have affected the company under different management. Legitimate add-backs can provide a significant boost to a company’s valuation.

5 ways the COVID-19 pandemic might affect the sale of your business

The COVID-19 pandemic has proven to be boom or bust for many businesses. In this article, we’ll explore 5 ways that the resulting economic climate is likely to affect the sale of a business, for better or worse.

Should you hire a business broker to sell your business?

Explore some key questions to ask when considering whether it makes sense to hire a business broker to sell your business.

Dilution

What It Means

Why It’s Important

Related Terms

Related Posts