Diluting stock of a company
How would one go about Diluting stock in company and what are the most common situations where dilution occurs?
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So if you dilute a stock of the company does every shareholder need to agree on terms or you can decide it yourself if your holding a majority stake in the business (51%+)? – Peter K. 12 years ago
2 Answers
Companies and especially startups issue new stock all the time. Add a co-founder? Issue 1,000,000 new shares. Hire an employee? Give them 20,000 stock options (that will eventually turn into stock).
Each time the company creates new shares, whatever number of shares you own gets diluted, because as a percentage, you own less of the total.
Sometimes, dilution can be used to wipe-out previous investors or founders. It works by issuing a huge number of shares. Imagine so far the company had 10M shares, with grumpy Joe the old co-founder who everyone hates. Simply issue 100M shares (ten times more), now Joe's share is divided by 10 and becomes insignificant. Split those 100M shares with the team you want to keep, and bingo, you just kicked Joe out (watch for lawsuits though).
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Actually you have just 100% invited a lawsuit. This is theft - unless authorized by old joe. Shareholder rights are a major issue. – Net Tecture 12 years ago
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Is the issuing of new stock called stock split? – Mat Banik 12 years ago
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Stock split is slightly different. – Alain Raynaud 12 years ago
First, read this: http://www.investopedia.com/terms/d/dilution.asp#axzz1Yj4pchYC Dilution can can happen from employee stock option exercise, by offering additional shares into the market (to raise money trough an equity issuance), as well as other ways (convertible debt, etc.).
