Dilution
The reduction in an existing shareholder’s percentage ownership when a company issues new shares.
Dilution happens when new shares are issued to an investor, a convertible instrument, or an employee option pool. The holder still owns the same number of shares, but they are a smaller share of a larger total. Relative dilution is the proportional loss of the stake: a holder who goes from 60% to 48% has been diluted by 20%, a change of 12 percentage points.
Dilution is not the same as a loss of value. If the company is worth more after the round by more than the stake shrank, the smaller stake is worth more than the larger one was. A stake diluted by 20% needs the company to be worth 1.25 times as much to keep the same value.
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