What is Share Dilution?
Share dilution is the decrease in ownership when additional shares/equity are issued as a result of a corporate transaction. Share dilution can also be called equity dilution and or stock dilution.
Shares in private companies can have provisions of non-dilutive shares, where the equity owner will always keep the same percentage. Companies can also use strategies to raise money that is non-dilutive to the equity holders.
A Share Dilution Example
- Tim and Jim each own 50% of XYZ company. They sell 10% of XYZ to ABC for $100k.
- Tim and Jim now each own 45% and ABC owns 10% of XYZ company.
- Tim and Jim were each diluted by 5% to account for ABC's new ownership percentage. In a simple form, the above example seems fair.
- However, what if Tim had to give the full 10% to ABC and Jim did not lose any equity percentage? Jim would then have a larger percentage than Tim, without having to offer additional investment.