Stories abound of Business owners who were cheated out of their company and their shares made useless. Imagine sleeping with 40% shares of a company and waking up to 10% shares. Welcome to shares dilution, ask Paul Allen, co-founder of Microsoft.


Equity dilution occurs where a company issues new shares to investors and when holders of stock options exercise their right to purchase stock. With more shares in the hands of more people, each existing holder of common stock owns a smaller or diluted percentage of the company.


One of the easiest way to make a Co-Founders Shares useless or lesser is through shares dilution or Equity Dilution. Founders start out with 100% of the company and every time they raise capital and/or issue stock and options to their management team, that number goes down.

Example:
Exampy 1:. If you owned 50% of a company valued at $2M, your stake would be worth $1, 000, 000K. If you get diluted by 20% by issuing new shares and the value of the company stayed the same, your stake would be worth $800K. So your stake is worth $200K (20%) less than it was.


Example 2: If a company initially issues 100 shares, and shareholder A owns 10 shares, they hold 10% relative ownership in the company.

However, if in a second round of investment the company issues a further 100 new shares, shareholder A will now hold 5% relative ownership of the company’s new total issued share capital of 200 shares. This is known as percentage dilution.

As with most things, equity dilution has both positive and negative sides, but founders and investors should be weary of the negative effects.


In the next post I will be discussing about you can prevent share dilution or make it work in your favour.





Opatola Victor
adeopatola@gmail.com
09041815408 , 07069687425

OpatolaEsq:


Stories abound of Business owners who were cheated out of their company and their shares made useless. Imagine sleeping with 40% shares of a company and waking up to 10% shares. Welcome to shares dilution, ask Paul Allen, co-founder of Microsoft.


Equity dilution occurs where a company issues new shares to investors and when holders of stock options exercise their right to purchase stock. With more shares in the hands of more people, each existing holder of common stock owns a smaller or diluted percentage of the company.


One of the easiest way to make a Co-Founders Shares useless or lesser is through shares dilution or Equity Dilution. Founders start out with 100% of the company and every time they raise capital and/or issue stock and options to their management team, that number goes down.

Example:
Exampy 1:. If you owned 50% of a company valued at $2M, your stake would be worth $1, 000, 000K. If you get diluted by 20% by issuing new shares and the value of the company stayed the same, your stake would be worth $800K. So your stake is worth $200K (20%) less than it was.


Example 2: If a company initially issues 100 shares, and shareholder A owns 10 shares, they hold 10% relative ownership in the company.

However, if in a second round of investment the company issues a further 100 new shares, shareholder A will now hold 5% relative ownership of the company’s new total issued share capital of 200 shares. This is known as percentage dilution.

As with most things, equity dilution has both positive and negative sides, but founders and investors should be weary of the negative effects.


In the next post I will be discussing about you can prevent share dilution or make it work in your favour.





Opatola Victor
adeopatola@gmail.com
09041815408 , 07069687425

I want to correct some miscobceptions

Stories abound of Business owners who were cheated out of their company and their shares made useless. Imagine sleeping with 40% shares of a company and waking up to 10% shares. Welcome to shares dilution, ask Paul Allen, co-founder of Microsoft.

Share dilution is not altogether a bad thing. It's better to own 10% of a company that is valued at $100 billion than to own 50% of a company that is valued at $1 billion.


Equity dilution occurs where a company issues new shares to investors and when holders of stock options exercise their right to purchase stock. With more shares in the hands of more people, each existing holder of common stock owns a smaller or diluted percentage of the company.


One of the easiest way to make a Co-Founders Shares useless or lesser is through shares dilution or Equity Dilution. Founders start out with 100% of the company and every time they raise capital and/or issue stock and options to their management team, that number goes down.

It is impossible to dilute the shareholding of a person who owns 100% without his knowledge!

Example:
Exampy 1:. If you owned 50% of a company valued at $2M, your stake would be worth $1, 000, 000K. If you get diluted by 20% by issuing new shares and the value of the company stayed the same, your stake would be worth $800K. So your stake is worth $200K (20%) less than it was.

In the example above $1,000,000 is not actually the value of the company, it is the issued share capital of the company which may be the less or equal to the authorised share capital of the company (The authorised share capital is the maximum equity the company is legally allowed to raise based on what is included in it;s incorporation documentation)


Example 2: If a company initially issues 100 shares, and shareholder A owns 10 shares, they hold 10% relative ownership in the company.

However, if in a second round of investment the company issues a further 100 new shares, shareholder A will now hold 5% relative ownership of the company’s new total issued share capital of 200 shares. This is known as percentage dilution.

Usually when a second round of shares are about to be issued the existing shareholders are given a right of first refusal to purchase a corresponding number of new shares so that they can still maintain their same percentage shareholding after the new shares are issued. This is called a Rights Issue

As with most things, equity dilution has both positive and negative sides, but founders and investors should be weary of the negative effects.


In the next post I will be discussing about you can prevent share dilution or make it work in your favour.