Share dilution occurs when a company issues additional shares, reducing the ownership percentage of existing shareholders. This often happens during funding rounds, stock option exercises, or convertible securities conversions. While dilution decreases the proportional ownership of existing shares, it can also increase the company’s overall value if the new shares raise significant capital.
How does share dilution affect startup founders and early investors?
Share dilution reduces the percentage of ownership held by founders and early investors, which can affect decision-making influence and share value. However, if the dilution leads to significant growth or an increase in the company’s valuation, the monetary value of their shares may still grow despite the reduced percentage.
Is share dilution always negative?
Share dilution is not inherently negative. While it reduces ownership percentages, it can enable the company to secure vital funding for growth, hire top talent, or invest in strategic initiatives. If managed effectively, the increased value from these efforts can outweigh the dilution’s impact, benefiting all shareholders in the long run.
Or want to know more about pre-seed funding?
