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Very good article, but it's incorrect in some areas. "Companies raise money by selling new stock after the board of directors authorizes the sale to investors.

Very good article, but it's incorrect in some areas. "Companies raise money by selling new stock after the board of directors authorizes the sale to investors. Those new shares are created out of thin air by the company, and will dilute all of the current stockholders." These shares are not created out of "thin air" as the article states. When a corporation is formed, it requests and is granted a certain number of shares by the state in which it is created. These are the authorized shares. At this point, the company may sell shares from their authorized pool of shares. The shares that are sold to raise money are called the issued shares. This is the point of error. The shares are not created out of thin air, but are rather moved from the authorized shares to the issued shares pool. Additionally, the company may decide to buyback some of their shares from the people who they sold the shares to. Shares that are repurchased are called treasury stock. The shares that are not repurchased are considered outstanding. Only the issued and outstanding shares have any voice in the company. Authorized and treasury shares can not vote. To recap, here is a quick diagram: Authorized |-Issued |--Outstanding |--Treasury Outstanding is highlighted because that is the only category that has an influence on voting and percentage of ownership. For most young companies, you won't have to worry about the other classes of stock, but for medium+ companies, it's a good thing to understand going into a negotiation for equity compensation.

payne92 19y ago
I'll concede that 'thin air' is probably an oversimplification, for the purposes of this essay. My point is that the company sells new shares up to the amount authorized, to raise money. In my experience, the authorized number of shares is a minor point; the board/majority shareholders will increase it if it's ever a limiting factor. Before those shares are sold (issued), they don't really exist -- nobody votes them, they're not compensated if company is acquired, etc. Hence, the simplified "thin air" description.
- dkokelley 19y ago
  Sure, for the purposes of the essay it works fine. I just didn't want people to misunderstand the process of dilution. This site is geared towards hackers - many of whom are or will be founders. They will have to deal with significant ownership and dilution between investors and other founders. I thought it was a good idea to clarify how stocks work for them. Also, the board of directors can't exactly increase the number on their own. They have to get permission from the state to do so, since it could have an effect on ownership. If I had a 49% stake in a company, the 51% couldn't authorize and issue themselves more stock to keep me from getting control, but they could dilute my ownership by bringing stock out of treasury or issuing stock from their authorized amount. A last note, I believe that most companies issue stock compensation directly out of their treasury stock, so if you'll be getting a good deal of ownership, it will probably be from that stock pool. Take that into account to figure out your ownership percentage.

payne92 19y ago

I'll concede that 'thin air' is probably an oversimplification, for the purposes of this essay. My point is that the company sells new shares up to the amount authorized, to raise money. In my experience, the authorized number of shares is a minor point; the board/majority shareholders will increase it if it's ever a limiting factor. Before those shares are sold (issued), they don't really exist -- nobody votes them, they're not compensated if company is acquired, etc. Hence, the simplified "thin air" description.

dkokelley 19y ago
Sure, for the purposes of the essay it works fine. I just didn't want people to misunderstand the process of dilution. This site is geared towards hackers - many of whom are or will be founders. They will have to deal with significant ownership and dilution between investors and other founders. I thought it was a good idea to clarify how stocks work for them. Also, the board of directors can't exactly increase the number on their own. They have to get permission from the state to do so, since it could have an effect on ownership. If I had a 49% stake in a company, the 51% couldn't authorize and issue themselves more stock to keep me from getting control, but they could dilute my ownership by bringing stock out of treasury or issuing stock from their authorized amount. A last note, I believe that most companies issue stock compensation directly out of their treasury stock, so if you'll be getting a good deal of ownership, it will probably be from that stock pool. Take that into account to figure out your ownership percentage.