What to do if your shares are getting diluted?
We’ve had clients calling us in a panic when they hear the words “share dilution“. They are not wrong in worrying about their money losing value. It’s important, however, to understand what it really means and why it happens.
There are TWO basic types of dilution:
Remember how I said above that Each Existing Shareholder receives fewer profits from the company? Well, 123 Inc.’s profits are $29,000 for the year, then the profit of each shareholder is calculated below:
- dilution of the percentage holding of the existing shareholder (because the corporation has issued more shares), and
- dilution of the value of the shares (because the corporation has issued shares for less per share than the investor paid).
# of shares = 10,000
# of shareholders = 100
# of shares/shareholder = 100
% ownership = (100 ÷ 100,000) x 100 = 1.0%
AFTER Issuing Shares:
# of shares = 11,000
# of shareholders = 110
# of shares/shareholder = 100
% ownership = (100 ÷ 11,000) x 100 = 0.9%
BEFORE Issuing Shares:
$29,000 ÷ 10,000 = $2.90 per share
AFTER Issuing Shares:
$29,000 ÷ 11,000 = $2.63 per share
The profit of each shareholder dropped by 27 cents ($2.90 – $2.63) per share that they owned!