Help me understand issuing shares


1

If a company issues more shares does that reduce the value of the shares already issued? Logically it should.

For example if I gave 10% to someone for some work then later double the number of sharesId have. Have i just reduced the value of his stock to 5%?

Also can anyone recommend a good site for understanding shares?

I'm in the UK but my understanding is shares work the same way internationally. Is that correct?

Shares

asked Dec 27 '11 at 20:45
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Tom Squires
1,047 points
  • Yes, that is correct. If you issue more shares, it generally dilutes the existing shareholders – Susan Jones 8 years ago
  • So if you were dishonest you could really screw over early contributors? – Tom Squires 8 years ago
  • Susan's comment was actually the answer! And, this is really an accounting issue, so you would have to look at the accounting to see how it works. Specifically Issueing Additional Shares. You might find an explanation in a basic corporate finance textbook. – Patrick Ny 8 years ago
  • Theoretically, yes, although usually all current shareholders would get diluted together. It's possible to be dishonest about almost anything if you want to - and if you also enjoy disputes, bad relationships and court cases. I wouldn't advise it though - it's bad business practice and that's not the kind of entrepreneur I personally want to be. – Susan Jones 8 years ago
  • There are sometimes anti-dilution provisions. Which means if a corporation issues additional shares to a new shareholder, existing shareholders should also receive additional shares to ensure their percentage of ownership remains the same. – Vasiliy 8 years ago

4 Answers


2

The corporation has a fixed valuation. This cannot be changed at will (other than by doing very stupid things to reduce the value, or doing very intelligent things to increase the value).

A "share" is an ownership fraction. If you issue 10 shares of stock total, then each share represents a 10% ownership stake. If you issue 100 shares, each share represents 1% and so on.

You can have shares less than 1%, and in fact this is very common. Also, the shares do not have to indicate any whole amount in dollars or cents. So you can create 1,000,000 shares of stock for a company that has a total net worth of $100 and issue them appropriately.

Now, if you originally issued 100 shares, and allocated 20 of them, and then you create another 100 shares of stock, you now have a total stock pool of 200 shares. But, the company valuation has not changed at all, so each share is now worth .5%, and the relative value of those 20 shares issued to people will have dropped by 1/2 (they now have an ownership stake of exactly 1/2 of what they originally had in a corporation whose value has remained constant).

Sometimes when issuing new shares an additional allocation is made to previous stock holders so that the dollar value of their stock remains constant.

That's a brief explanation, I hope it helps.

answered Dec 28 '11 at 05:14
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Brian Karas
3,407 points

1

A great site for understanding share is www.SlicingPie.com (yes, this is my site. I spend a lot of my life helping people understand start-up equity)

What you are describing is Dilution. It is a natural adjustment in ownership that occurs when the company distributes more shares to those who deserve it. So, if I own 50 out of 100 shares, then I own 50% of the company. If it’s a start-up company my 50% is probably worth nothing. However, if the company sells half the company for $1,000,000 and issues another 100 shares my ownership dilutes to 25% instead of 50%. However, the underlying value of my ownership went from being worthless to being worth $250,000. In this case, dilution is a good thing. I never would have built value in the company unless I was willing to be diluted.

People fear dilution because we don’t want to be taken advantage of by other participants in the company. If I invest in a company and receive 10% of 100 shares (10 shares) what’s to prevent the owners from simply granting more shares to themselves and diluting my shares with no gain in value? In this case, other people will benefit at my expense. However, the reverse is also true. If the company has to issue me more stock whenever they issue stock to someone else I am essentially getting more stock for doing nothing. So, I am benefiting at the expense of others. Both scenarios are problematic. However, most of us would rather have the problem of getting more than we deserve.

One way to avoid the hard feelings of dilution is to use a dynamic equity split. This will allow you to calculate exactly what each person deserves and issue stock accordingly. When you issue arbitrary amounts of stock early on you always run into problems.

answered Jan 24 '13 at 09:16
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Mike Moyer
284 points
  • +1 good advice. Can you point to a example of a dynamic equity split agreement? – Jim Galley 7 years ago

0

Help me understand issuing shares. a good site that will help you is the LSE and its fantasy shares game,it will help you learn and practice in buying and selling shares and explain all about spread betting,it also has info for you to learn all aspects of trading,you can also sign up for free RNS and discuss anything you want to know with other traders and university students as well, as there is a chat site for every company on the stock exchange.the real company RNS can teach you alot,as in some of the statements the companies have to disclose certain aspects of the companies policies that explain everything about dilutions and consolidations for share holders to look at,as it is part of the rules that these companies have to opbide by or they get delisted from share trading.

Suga

answered Oct 26 '12 at 02:44
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Suga
21 points

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The issue depends upon what price you are issuing the shares. If the intrinsic value per share in your company is say $20 (against a face value of $10) and you are issuing for $21, it does not impact the existing holders. However, if you are issuing below $20, it does impact the existing shareholders.

There are various way of valuing share issue prices. The impact on the existing share will depend upon the pricing mechanism you choose.

answered Dec 29 '11 at 12:38
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Natwar Lath
294 points

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