Share dilution happens when a company issues additional shares in itself. As a result, the existing shareholders' proportionate ownership in the company is reduced—or diluted—when these new shares are issued.
A small business has 100 shares in issue. It has ten shareholders all owning ten shares each and therefore each shareholder owns 10% of the company. The following year, the company issues another ten shares to a different party (this can, for example, be either directly to a single investor or to satisfy an option which a share plan participant has exercised over ten shares). There are now 110 shares in issue, and each of the 11 shareholders now owns ten shares each. These ten shares now only represent 9% of the company. In this way, as a result of the company issuing an additional ten shares in itself, the original shareholders are each diluted from 10% ownership to 9%.
Dilution of existing shareholders can be caused in various circumstances.
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