They mean that you own a specific fraction of the company (at least until the stock gets diluted). If the company is worth $X, and you own Y% of it, then your stock is worth $XY/100.
it entitles you to sell that legal fractional ownership to someone else.
If your fraction is high enough, you could have full legal control. But since it's very dispersed, there would be a discount on the value of that legal ownership.
But the fact that you still own it is worth something, and that is exactly what the share price is indicating.
It’s dilution at the same time as money is literally injected into the company. Say a company valued at $100M issues 10% more shares at the same time as it receives a $10M investment (10% of its value), thus becoming a $110M company. In theory, the existing shares lose no value in the process: $110M * (100%/110%) = $100M
Of course, there are always disagreements about valuation and strategy.
> the number of fully-diluted shares (to calculate your ownership)
This is something I've always been confused about. Suppose there are 100M fully diluted shares and you as an employee are granted (and vest) 20,000 shares, so you have 0.02% of the total shares. And suppose the company has a private post-money valuation of $10B and then IPOs to a stable $10B market cap. So you would think (0.02%)×($10B) = $2M payout.
But! This doesn't include the fact that during an IPO, the company creates additional shares, right? And none of these new shares are sold directly to the public; they are first sold to banks or other prioritized buyers, and only then is the public able to purchase shares from anyone who owns them. Would this not decrease the employee payout? Assume the company creates 100M new shares for the IPO at a price of $50 per share. Now the banks pay the company (100M)×($50) = $5B for those shares, and then they sell them the next day on the open market. The final share price for the day would now have to be $10B/200M = $50 to have a market cap that is equivalent to the private valuation of $10B. But that means the employee's payout is actually $1M, not $2M.
Is my understanding of this correct, or am I missing something? It seems like you can't just take your percentage of private shares and multiply it by the private valuation to estimate your IPO payout.
Ah, I see, that makes sense. I don't know what I was thinking. Of course selling stock is dilution, it's not like the company has extra stock it is holding in itself.
I thought stocks represented ownership of a company. If a company has 100 stocks and I own 50, I own 50% of the company. If the company issues 100 more, shouldn't 50% go to me, since a share represents a part of the company ownership and I own a known percentage of the company?
How is it legal to say "you bought 50% of this, but now I've arbitrary decided that I own 99% of it because I gave myself more percent"
Does that just happen with stock options or normal stocks as well? It would seem that if there are 100 shares and I have 1, then it should be worth 1% of the company no matter how successful it becomes. I can understand how options might be subject to tinkering, but if stocks are as well then the whole thing sounds like a racket.
I just mean that the idea of dilution suggests to me that the original company has been dissolved and reconstituted somehow. That sounds like something seriously in need of regulation...
What that means tangibly varies from business to business.
You might get a cut of the profits in the form of dividends... unless you don't. Plenty of stocks never pay dividends. A lot of companies pay more to charity than to dividends to investors.
Or, you get a vote on company policy at the stockholder's meeting... But if the founders own more than half the stock, that doesn't actually matter. And that's assuming the founders haven't just sold stock with no voting privileges.
If the company files for Chapter 7 bankruptcy, stock owners are entitled to company assets... And almost never see any, because they're last in line behind every other creditor.
So it's unclear what, precisely, the practical weight of "partial ownership in a real business" has in general. In specific, sure; stock could be access to dividends or a meaningful voice in company policy. For a lot of stock, the only real value is "How much will someone else pay me for this piece of the action?"
>I hate to turn this into finance 101, but there seems to be some confusion here.
There does indeed seem to be some confusion. The problem is you're the one who is confused.
>Owner a has 50 shares. Owner B has 50 shares. Total is 100 shares. They decide they want to give Jim Bob some shares for his birthday. They issue 50 more shares to do so. Owners A and B have been diluted and the value of their shares has decreased. That is dilution.
The part where they issued new shares is dilution. But the part where they give them away, guaranteeing a drop in the price of the stock, is not.
In the real world corporations don't give stock away. They will sell those 50 shares on the open market and use the money to, say, buy capital equipment. In most cases the price of the shares will remain unchanged, because the value of the company's assets have increased by a corresponding amount. The price is absolutely not guaranteed to go down.
Issuing new shares has no more effect on the share price than raising capital through other means like borrowing from the bank or issuing bonds.
I hate to turn this into finance 101, but there seems to be some confusion here.
Owner a has 50 shares. Owner B has 50 shares. Total is 100 shares. They decide they want to give Jim Bob some shares for his birthday. They issue 50 more shares to do so. Owners A and B have been diluted and the value of their shares has decreased. That is dilution.
You cannot increase the number of shares in a company without decreasing the value of the shares. This is a hard, mathematical relationship.
Dilution is not financing. Dilution does not change the value of a company. Dilution is bad. When someone way up this thread quipped "yeah, it's great except for the dilution" (paraphrased), that is what he meant (I think - forgive me if I misread). In other words, "Yawn. Tesla is still in business".
Everyone seems to be confusing the definition of dilution with the reasons someone might choose to be diluted.
At the end of the day, it's belief by someone in future dividends or purchase by another entity. If you don't want the latter to mean 'speculation', then take it to mean 'wholesale acquisition by another company.' That makes stock valuable too.
Right. The remaining shareholders own a larger percentage of a company that now owns less cash.
Say the only thing my company owns is a bank account with $100 in it. There are 5 shares outstanding worth $20 each. The company buys back one share for $20, so now there are 4 shares outstanding in a company that owns $80.
I looked up if a company can do the opposite - basically poof additional shares into existence and sell them - and found out they basically can and it's called stock dilution.
How is that legal? It doesn't make sense to me that if a share is worth x% of a company that said company can just decide "Nah, you actually now only own half of that" and sell more shares.
Fake edit: I googled "how is stock dilution legal" and found this [0] which explained it well and now it makes sense to me. The diluted stock might be a smaller % ownership, but since the company gained value because of money coming in, the dollar value of the shares stays the same.
The right to sell it when the price rises. You own a part of the company which you acquired at a price that you presumably considered below fair value. Even though there is no premium for voting rights nor expected dividends, but you still own a fraction of the company.
Yes, exactly. They have 10% of the shares but they might end up with more than 10% of the proceeds of a sale, if the sale price is less than $2B. That has an impact on the value of the remaining shares.
At worst, a fraction of the value of all the companies physical assets and IP, which is significant. At best, fractional control over huge amounts of revenue that the company earns.
A share isn’t just some token, it conveys ownership of a public company.
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