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Could someone explain dilution like I'm 5? I haven't researched it much, but I always assumed additional shares would be split between existing shareholders. F
by User8712 13y ago
Could someone explain dilution like I'm 5? I haven't researched it much, but I always assumed additional shares would be split between existing shareholders.
For example, let's say there are 10 shares in a company, and I own 1. We decide we need 100 shares in total. Dilution makes me think 90 new shares are issued, and I still own 1, bringing my ownership down from 10% to 1%. However, common sense tells me if you issue 90 new shares, since I already own 10%, that means 10% of the new shares should belong to me. So, I now have 1 + 9, or 10/100 shares, remaining at 10% ownership.
Why is the above not always the case?
- helpful 13y agoYour latter argument is incorrect. Let's say there are 200 shares issued. Let's say you are a solo founder and own 100 percent of the company. Investor comes in and wants 20%. You would issue him 50 shares and that would dilute your percentage to 80%. Total shares issued now is 250 shares. Your shares don't change and you don't just get issued new shares. That's why in startups people reference actual shares of stock rather than percentages. Percentages is just a way for people to communicate. That said, in an actual startup we're talking about tens of thousands to millions of shares initially rather than this dumb down version. As for why your version isn't always the case, it's obvious that if everyone shares get increase accordingly, and retain their percentage ownership, there'd be no new shares/percentage going to new investors of employees