What it means
Imagine a company as a pie divided into slices. Each slice represents a share of the company.
When the company issues more shares, it's like cutting the pie into more slices. Each person's slice becomes smaller if they don't buy more of the new slices.
This means their ownership part of the company decreases in size. Dilution can happen when a company raises more money by selling additional shares.
It might also occur when employees or investors convert their stock options or warrants into shares. While dilution reduces each shareholder's ownership percentage, the money raised through issuing new shares can help the company grow.
In practice
Real-world examples.
Example
Imagine you're an entrepreneur who owns 50% of your startup with 100 shares. If you issue 100 more shares to a new investor, your ownership drops to 25% because there are now 200 shares in total.
Example
A small business with 1,000 shares decides to issue 500 new shares to raise funds for expansion. The original owners now own a smaller percentage of the business, as the total number of shares has increased to 1,500.
Think of it
“Think of a group of friends sharing a pizza. If more friends join and you have to cut the pizza into more slices, each friend gets a smaller piece.
Questions
People also ask.
What is Dilution?
Dilution is when the ownership percentage of existing shareholders in a company decreases because new shares are issued.
What does Dilution mean in practice?
Imagine a company as a pie divided into slices. Each slice represents a share of the company. When the company issues more shares, it's like cutting the pie into more slices. Each person's slice becomes smaller if they don't buy more of the new slices. This means their ownership part of the company decreases in size. Dilution can happen when a company raises more money by selling additional shares. It might also occur when employees or investors convert their stock options or warrants into shares. While dilution reduces each shareholder's ownership percentage, the money raised through issuing new shares can help the company grow.
Can you give an example of Dilution?
Imagine you're an entrepreneur who owns 50% of your startup with 100 shares. If you issue 100 more shares to a new investor, your ownership drops to 25% because there are now 200 shares in total.
What's a simple way to think about Dilution?
Think of a group of friends sharing a pizza. If more friends join and you have to cut the pizza into more slices, each friend gets a smaller piece.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related