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Can you expand on this a bit. Dilution itself is usually not a problem when fundraising, the expectation is that the new funds will increase the Net Present Val

by kaib 13y ago

Can you expand on this a bit. Dilution itself is usually not a problem when fundraising, the expectation is that the new funds will increase the Net Present Value of the company more than the dilution. Are you saying this is not true or is there some functional reason why dilution is bad in this particular case?

damoncali 13y ago
Dilution is always bad. It means you own less of the company. It's necessary in order to finance a company like Tesla, but bad nonetheless. But the price of Tesla is not based on such things like cash flow and future profits. So I'm not sure it is bad - for now.
- marvin 13y ago
  The alternative to dilution is not having capital for expansion and getting crushed by competitors that do. So I dispute that dilution is in itself bad.
  - damoncali 13y ago
    Hence the "necessary to finance a company like Tesla".
- kaib 13y ago
  Owning less of a much larger pie does seems sensible from a monetary standpoint. It seems like you are optimizing for percentage ownership of the company instead of actual value of your stake?
  - damoncali 13y ago
    You are mixing up your definitions. Dilution is defined as the reduced ownership in a company. It is 100%, always, take-it-to-the-bank, written-in-stone bad for the shareholder who gets diluted. Financing a company may create dilution and still put the shareholder in a better spot ultimately. For Tesla, a high-growth capital-intensive business, you can bet on the dilution part happening (they have to get the money from somewhere). The better off part is still an open question.
    - tsotha 13y ago
      >Dilution is defined as the reduced ownership in a company. It is 100%, always, take-it-to-the-bank, written-in-stone bad for the shareholder who gets diluted. No, this isn't true at all. If it were, companies would never issue new shares, since shareholders wouldn't allow it.
      - damoncali 13y ago
        That's not what "dilution" means. Dilution necessarily reduces the per share value of the stock. Always. That is the definition of the word. Shareholders allow it because the company gets money in return for that dilution, which will presumably increase the value of their shares over time.
        tsotha 13y ago
        >Dilution necessarily reduces the per share value of the stock. Always. No. This is wrong. Dilution is the reduction in percentage of ownership of the company, not a reduction in the stock price. It may reduce, increase, or leave the price of the stock unchanged depending on whether or not the market thinks the company will make good use of the incoming money.
        damoncali 13y ago
        I hate to turn this into finance 101, but there seems to be some confusion here. Owner a has 50 shares. Owner B has 50 shares. Total is 100 shares. They decide they want to give Jim Bob some shares for his birthday. They issue 50 more shares to do so. Owners A and B have been diluted and the value of their shares has decreased. That is dilution. You cannot increase the number of shares in a company without decreasing the value of the shares. This is a hard, mathematical relationship. Dilution is not financing. Dilution does not change the value of a company. Dilution is bad. When someone way up this thread quipped "yeah, it's great except for the dilution" (paraphrased), that is what he meant (I think - forgive me if I misread). In other words, "Yawn. Tesla is still in business". Everyone seems to be confusing the definition of dilution with the reasons someone might choose to be diluted.

by kaib 13y ago

damoncali 13y ago

Dilution is always bad. It means you own less of the company. It's necessary in order to finance a company like Tesla, but bad nonetheless. But the price of Tesla is not based on such things like cash flow and future profits. So I'm not sure it is bad - for now.

marvin 13y ago
The alternative to dilution is not having capital for expansion and getting crushed by competitors that do. So I dispute that dilution is in itself bad.
- damoncali 13y ago
  Hence the "necessary to finance a company like Tesla".
kaib 13y ago
Owning less of a much larger pie does seems sensible from a monetary standpoint. It seems like you are optimizing for percentage ownership of the company instead of actual value of your stake?
- damoncali 13y ago
  You are mixing up your definitions. Dilution is defined as the reduced ownership in a company. It is 100%, always, take-it-to-the-bank, written-in-stone bad for the shareholder who gets diluted. Financing a company may create dilution and still put the shareholder in a better spot ultimately. For Tesla, a high-growth capital-intensive business, you can bet on the dilution part happening (they have to get the money from somewhere). The better off part is still an open question.
  - tsotha 13y ago
    >Dilution is defined as the reduced ownership in a company. It is 100%, always, take-it-to-the-bank, written-in-stone bad for the shareholder who gets diluted. No, this isn't true at all. If it were, companies would never issue new shares, since shareholders wouldn't allow it.
    - damoncali 13y ago
      That's not what "dilution" means. Dilution necessarily reduces the per share value of the stock. Always. That is the definition of the word. Shareholders allow it because the company gets money in return for that dilution, which will presumably increase the value of their shares over time.
      - tsotha 13y ago
        >Dilution necessarily reduces the per share value of the stock. Always. No. This is wrong. Dilution is the reduction in percentage of ownership of the company, not a reduction in the stock price. It may reduce, increase, or leave the price of the stock unchanged depending on whether or not the market thinks the company will make good use of the incoming money.
        damoncali 13y ago
        I hate to turn this into finance 101, but there seems to be some confusion here. Owner a has 50 shares. Owner B has 50 shares. Total is 100 shares. They decide they want to give Jim Bob some shares for his birthday. They issue 50 more shares to do so. Owners A and B have been diluted and the value of their shares has decreased. That is dilution. You cannot increase the number of shares in a company without decreasing the value of the shares. This is a hard, mathematical relationship. Dilution is not financing. Dilution does not change the value of a company. Dilution is bad. When someone way up this thread quipped "yeah, it's great except for the dilution" (paraphrased), that is what he meant (I think - forgive me if I misread). In other words, "Yawn. Tesla is still in business". Everyone seems to be confusing the definition of dilution with the reasons someone might choose to be diluted.