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

Interesting Topic.

Love this. Front page worthy