What does the dilution mean and example

Dilution is the reduction in ownership of a company as an effect of the issuance of shares. There are a number of calculations to make before getting the final percentage of dilution. Let us take an example to walk through this and understand it better. Let us say that you are the only owner of a company and have 1,000 shares. What would happen if you issue 100 more shares? This would make the total number of shares to be 1000+100 = 1,100 shares. So, you go from owning 100% of the company to owning 91% of the company and the new buyer now owns 9% of the company. To get the dilution of 9% as shared above, you will need to use the following formula:

Now, this example was with just one owner. What happens when there are two owners and then new shares are issued? Using the same example above; there are two owners and a total of 1,000 shares, where each owns 500 shares. Now, each owner owns 50% of the company. With this, 100 more shares are issued bringing the total amount of shares to 1,100. After this, one owner has 600 shares and the other has 500 shares, so that is 54.54% and 45.45% respectively. In this case, the formula for the dilution coefficient is slightly adjusted and it goes this way:

This is the dilution calculation for the person that purchases the additional shares, assuming that they buy them all. And if the shareholder doesn’t purchase any new shares, the situation doesn’t change. To know more about dilution and how it affects your cap table and ownership, check out our blog or knowledge center here. And if you have not yet started using Eqvista as your cap table application, it’s time to do so. Check out our cap table software here & contact us today!