Dilution is not something to be feared. It is something to be respected. Let me explain.
Dilution is a much talked-about topic among company founders, angel investors, and venture capitalists. Founders are understandably fearful of any dilution of their stake in the company. A company's founder always starts off owning 100% of the company. Then, the founder may sell off pieces of the company to key executives and employees, strategic partners, sources of equity capital, and others. Each time a new party gets new shares of stock from the company, all of the existing shareholders get diluted and own less of the company.
At first glance this seems bad - the founder used to own 100% of the company and now he owns less, often much less. But what did he get in return? Hopefully, by issuing stock to key executives and employees the founder was able to recruit and retain a highly motivated management team. By issuing stock to strategic partners the company got access to exciting new markets. By issuing stock in exchange for equity capital, the company got the funds it needed to complete its prototype, or to build its new factory, or to compensate its sales team.
Any time a company issues new stock the company's board of directors must evaluate whether or not the issuance will expand the size of the pie (the equity value of the company) enough to justify diluting the amount of the pie held by existing shareholders (their repsective percenatge ownership of the company). Of course, no company has a crystal ball, and stock issuances do not always benefit the company. If the board does its job correctly, however, dilution (along with the issuance that caused the dilution) will actually benefit the existing shareholders.
Bill Gates no longer owns 100% of Microsoft, but I imagine that he is quite pleased with the value of the 7% of Microsoft that he owns as of the company's most recent proxy statement!
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