Working as an executive at a UK company or any other is a difficult task. One of the significant responsibilities that executives usually come across is stock dilution. Private companies are often diluting stocks, whereas investors dislike the idea of dilution.
Hence, you must be wondering if stock dilution is a good idea. Below is some information to guide you.
Stock Dilution: Introduction
Share dilution is the reduction of the ownership percentage in a company due to the issuance of more stocks. For example, if you own 10 out of 100 shares in a company, your ownership is 10%. However, if 20 additional stocks are issued, then the ownership percentage will decrease.
Circumstances Of Dilution
Now that you know what stock dilution is let’s talk about some situations in which dilution applies. The situations include:
- Using ESO’s (employee stock options)
- Providing shares to people in exchange for assistance beneficial to the company
- Making secondary offerings to investors in return for financial aid
- Conversion to common stock
Generally, stock dilution will affect your company in one of the three ways:
- Bring benefits
- Do more harm than good
- Has no positive or negative effect
Here are some implications of dilution that might enlighten you.
How Is Diluting Stocks Beneficial?
Many shareholders believe that dilution is terrible for the welfare of the company. However, that is a misconception. Following are some of the benefits of stock dilution:
- Stimulates gross income
- It helps increasing money for new projects
- Aids in buying out an opponent
- Issuing new stocks to employees’ helps decrease possession of external stakeholders
- Value of company can be increased
Thus, stock dilutions do result in favourable outcomes for the growth of a business.
Though there must be a reason why people view stock dilution negatively. Let’s consider the other side to gain a better grasp of the concept.
Drawbacks Of Dilution
Investors are not prone to the idea of dilutions. These are some of the reasons for their reluctance.
- Decreases their ownership and stake in the company
- Increases risk of loss as there is no guarantee of a new venture resulting in a profit
- Earnings of stakeholders per share also reduce
- The influence of shareholders in company decisions decreases as voting rights are affected
- Some people dislike the use of dilutions to increase ownership internally.
However, it would help to note that dilution does not devalue the current share prices. Moreover, many of the reasons to avoid dilutions are personal choices of the investors. Whereas company holders believe in diluting stock for business growth
Stock Dilution: Good Or Bad?
Company management plays a huge role in the outcomes of dilution. Moreover, for early startups, it is a crucial factor affecting their rise. Although, risky share dilutions are not as bad as perceived.
Stock dilution is neither good nor bad. The outcome depends on the role of company executives and shareholders. A dilution is more likely to be beneficial if a company has done its research carefully. We do not accept any liability for any loss or damage which is incurred from you acting or not acting as a result of reading any of our publications. You acknowledge that you use the information we provide at your