The investor’s field guide · D
Dilution
A reduction in an existing holder’s percentage ownership when a company issues additional shares or equivalent rights.
Explained by the editorial team
Dilution occurs when the total ownership base expands and an existing holder does not increase their holding proportionately. New investment, employee options and conversion of earlier funding can all produce it. A smaller percentage does not by itself establish whether the holding’s economic value has risen or fallen.
A worked example
An investor owns 100 of 1,000 shares, or 10%. If the company issues 250 new shares to someone else, the investor still holds 100 shares but now owns 8% of the 1,250 total. The company may have received useful capital in exchange.
What to examine
Model future funding needs, option pools and outstanding conversion rights. Pre-emption rights may offer a chance to maintain a percentage, but exercising them usually requires more money. Anti-dilution provisions are different: they may adjust particular investors’ economics after certain lower-priced rounds. Understand the agreed definitions and rights rather than assuming all shareholders experience an issuance in the same way.
General information, not investment, legal or tax advice. Examples are illustrative. Read the disclaimer.