Definition
Dilution
Dilution is the reduction in existing shareholders' percentage ownership when a company issues new shares.
When a company raises capital through a fresh issue, ESOP grants, convertible notes or new rounds, the total share count rises, so each existing holder's slice of the company shrinks unless they buy more. Dilution affects both ownership percentage and earnings per share.
In the startup context, founders and early investors are diluted at every funding round; in listed companies, fresh equity issues dilute public shareholders. Anti-dilution clauses, pre-emptive rights and pro-rata rights are tools investors use to protect against unwanted dilution.
Related terms
- Fresh IssueA fresh issue is the part of an IPO where the company creates and sells new shares, raising capital that goes onto its balance sheet.
- Anti-Dilution ProvisionAn anti-dilution provision protects investors from dilution if the company later raises money at a lower price than they paid.
- Pro-Rata RightsPro-rata rights let an existing investor put more money into a future funding round so they can maintain their ownership percentage and avoid getting diluted.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.