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Dilution Formula:
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Equity dilution occurs when a company issues new shares, reducing the ownership percentage of existing shareholders. This typically happens during funding rounds, employee stock option plans, or convertible note conversions.
The calculator uses the dilution formula:
Where:
Explanation: The formula calculates what percentage of the total post-issuance shares will be represented by the new shares, which equals the dilution percentage for existing shareholders.
Details: Understanding dilution is crucial for investors and founders to evaluate how funding rounds or equity grants affect their ownership stake and voting power in a company.
Tips: Enter the number of existing shares and the number of new shares to be issued. Both values must be non-negative numbers, and at least one must be greater than zero.
Q1: Is dilution always bad for existing shareholders?
A: Not necessarily. While dilution reduces ownership percentage, if the new capital increases the company's value sufficiently, the smaller percentage of a larger company can be worth more.
Q2: How can existing shareholders protect against dilution?
A: Through anti-dilution provisions, pre-emptive rights, or participating in funding rounds to maintain their ownership percentage.
Q3: What's the difference between dilution and valuation?
A: Dilution refers to ownership percentage reduction, while valuation refers to the company's worth. They're related but distinct concepts.
Q4: How does employee stock option pool affect dilution?
A: Creating an option pool typically dilutes all existing shareholders proportionally, as new shares are reserved for future employee grants.
Q5: Can dilution be reversed?
A: Companies can sometimes reduce shares through buybacks, but typically dilution is permanent unless specific provisions are in place.