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:

1. dilution of the percentage holding of the existing shareholder (because the corporation has issued more shares), and
2. dilution of the value of the shares (because the corporation has issued shares for less per share than the investor paid).

Today we will illustrate the first point: dilution of the percentage holding of the existing shareholder Issuing New Shares –> More Shares overall in the company –> Each Existing Shareholder owns the same number of Shares, but a smaller (diluted) percentage of the company –> Each Existing Shareholder receives fewer profits from the company. Still confused? Maybe this example will help! 123 Inc. started with 10,000 shares owned by 100 equal shareholders—meaning each shareholder owned 1% of the company. 123 Inc. needed more money to expand its growing business, so it decided to issue 1,000 new shares to 10 new equal shareholders. Now there are 110 equal shareholders that now own 0.9% of the company each — > their ownership got DILUTED from 1% to 0.9%! BEFORE Issuing Shares:   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: