Dilution

Equity Term

When new equity is issued, the percentage of the company owned by the existing shareholders goes down – that is called dilution.

The reason has to do with some simple math: at all times all of the ownership in a company across all of the owners adds up to 100% of the company.

So when new stock is created, for example to give to new employees or to sell to new investors, the total percentage of the previous owners goes from 100% to some smaller number – say, 90% if new investors now own 10% of the company. In this example you might say “my ownership was diluted by 10%”: if you owned 60% of the company before the investment, you would then own 54% after the investment because 10% of 60% is 6%, and 60% minus 6% is 54%.

See Dilution Happens for more.

Don Gooding

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