123

Theoretically, when a company issues more shares, it does not affect the value of your shares. The reason is that when a company issues and sells more shares, the proceeds from the sale of those shares goes back into the company. Using your example, you have 10 out of 100 shares of the company, for a 10% stake. Let's say that the shares are valued at $1,...


61

What can be done? Buy that person out or find a different method of financing the company. You're not going to get very far calling that person greedy and framing the entire issue around that. The shareholder agreement includes a provision not to dilute. Either find a different funding solution or come up with a more compelling argument than that ...


58

Here's another way that I look at it: Say you and me were 50-50 partners in a small business. Suppose we wanted to expand our business but that needed money. Someone (let's call him Warren) has the money we need & hence in return for the money we offer Warren an equal stake in the business. i.e. All three of us own 33% stake now. For both you and me ...


36

A no dilution privilege is precisely that, a privilege and not a duty. There is no reason to believe the shareholder is being greedy, after all, they are adding risk to their own position at the same time. A no dilution privilege only gives the right to maintain a constant percentage, if there are no resources to protect or maintain that right then it ...


35

Answer: the board. The board oversees the operations of the company and essentially supervises the CEO. The amount of actual supervision that takes place varies by company. While I cannot comment on Square, there other recent examples that are instructive. Darden is the parent company of brands like Olive Garden, and several others. It's a solid dividend ...


21

Stock dilution is legal because, in theory, the issuance of new shares shouldn't affect actual shareholder value. The other answers have explained fairly well why this is so. In practice, however, the issuance of new shares can destroy shareholder value. This normally happens when the issuing company: Sells the newly issued shares at an undervalued price. ...


16

There are various ways that a company can raise capital without diluting shareholder stakes. Have the company issue bonds. These are loans that the company will pay back with interest. Usually bond repayments consist of regular interest amounts during the life of the bond with a lump sum capital repayment at the end. The company could seek to get a bank ...


15

This may vary according to the jurisdiction the company is incorporated in, but in the one I'm somewhat familiar with (Denmark), neither the CEO nor the entire board can validly issue an unlimited number of new shares. The creation of new shares must be decided by a shareholder meeting and written into the corporation's bylaws. The shareholders can delegate ...


12

You might enjoy reading the book "Pay without Performance: The Unfulfilled Promise of Executive Compensation" The theoretical limit on what executives are paid comes from "arm's length bargaining" between the CEO and the board. That's the idea that there's a tough, hard-nosed negotiation between the CEO and the board, with the board representing ...


12

Alot of these answers have focused on the dilution aspect, but from a purely legal aspect, there are usually corporate bylaws that spell out what kind of vote and percentage of votes is needed to take this type of action. If all other holders of stock voted to do this, so 90% for, and you didn't, so 10% against, it's still legal if that vote meets the ...


11

If that company issues another 100 shares, shouldn't 10 of those new 100 shares be mine? Those 100 shares are an asset of the company, and you own 10% of them. When investors buy those new shares, you again own a share of the proceeds, just as you own a share of all the company's assets. A company only issues new share to raise money - it is a borrowing ...


8

Because the goal is for the company to get the investor's money not for the owner to get the investor's money. If the founder has 100 shares and sells 50 of them to the investor for $1 million, the founder has a nice chunk of change (and the associated tax bill) but the company has no more funds than it had when it started. Assuming the goal of the funding ...


7

The first line of defense against the CEO doing this is other board members; the CEo can't actually do anything without approval from the board of directors. But you ask "What stops management from doing this", so if the entire board colludes to give themselves stock, obviously they aren't a check on themselves. The next line of defense is shareholder votes. ...


7

It's even worse than you think. The high price for TOPS in 2004 was $173,502,005,248 The reason for this absurd price is that TOPS has had many, many reverse splits. Here are the ones since 2008: 03/20/2008 1 for 3 06/24/2011 1 for 10 04/21/2014 1 for 7 02/22/2016 1 for 10 05/11/2017 1 for 20 06/23/2017 1 for 15 08/03/2017 1 for 30 10/06/2017 1 for 2 03/...


6

There are two different issues here1: Creation of new shares: the company uses them to raise capital. Theoretically they do not affect the value of current stockholders assets. If you have a $1,000,000 company with 1,000 stocks, if you raise 1,000 new stocks you should value them at $1,000 so you get a $2,000,000 company with 2,000 stocks. The issue here is ...


6

Let x be the number of new shares issued (in thousands). Since the second investor gets a 10% stake, x / (500 + 500 + 333.333 + x) = 0.10 Solve this algebraic equation for x and you'll find x is roughly 148.148: x = 0.10 * (500 + 500 + 333.333 + x) x = 0.10 * (500 + 500 + 333.333) + 0.10 * x 0.9 * x = 0.10 * (500 + 500 + 333.333) x = 0.10 * (500 + 500 + ...


6

Stock issuing and dilution is legal because there must be some mechanism for small companies to grow into big companies. A company sees a great investment opportunity. It would be a perfect extension of their activities ... but they cannot afford it. To get the necessary money they can either take out a loan or issue shares. Taking a loan basically means ...


6

Your example assumes that by issuing new shares, the company suddenly increases its values tenfold, and, most amazingly, substantially increases it's income over night. This, of course, won't happen: The company has increased its number of shares, but it's fundamental value stays the same. Therefore, the sum of the value of the shares will be basically the ...


5

A company typically issues warrants* to investors & institutions participating in a new share or bond issue. The warrant is a "kicker" to sweeten the deal by granting participants the right, but not the obligation, to acquire stock in the company at a set price, by a given date. (On the surface, warrants are similar to call options, but different in ...


5

I think you're confounding the issuance size of 15% of common shares with the approximate 15% price drop that you've witnessed. IMHO, in this case that's more coincidence as opposed to correlation. The key factor I believe to be more relevant to the price drop is contained in the press release: The Company has agreed to sell to the underwriters (the "...


4

It's a dilution of the ownership; the public used to own x% of Facebook and now they own less than x% of the bigger Facebook that incorporates Whatsapp (assuming that Whatsapp was completely private before). Logically, the $15 billion is allocated proportionately between the existing stockholders (x% of it for the general public, y% for Mark Zuckerberg, etc)...


4

There are companies that grow by this method, they grow by acquisition. Sometimes it works and sometimes it doesn't. They have to find companies they can afford, and that they believe they absorb, and can continue to generate profits. The board of directors and the stockholders have to agree with this method, and they need to generate results. What can go ...


4

There is a major misconception in: For example, suppose the original company has an equity of $100 million and earns $15 million (i.e. 15% return on equity). Let's say the company decides to "dilute" the shares by issuing $900 million worth of shares. The equity is now $1 billion. If the company earns the same 15% return on equity on the new $900 ...


3

It is very rare that a company issues all of its shares. Typically a bank of shares are kept in reserve for the kind of things you are thinking about. In fact large companies often have buybacks of shares while at the same time issuing shares through ESOP and sometimes 401k matching which seems counter intuitive and inefficient. However, it is playing the ...


3

The answer to your question has to do with the an explanation of "shares authorized, issued and outstanding." Companies, in their Articles of Incorporation, specify a maximum number of shares they are authorized to issue. For example purposes let's assume Facebook is authorized to issue 100 shares. Let's pretend they have actually issued 75 shares, ...


3

To bluntly answer your questions: You shouldn't trust them, unless they were quite explicit with you up front that this might happen, this is a pretty sleezey move to pull. This isn't the sort of behavior I'd expect from someone capable of eventually brining the company to successful exit for investors such as yourself. It seems both amature and immature ...


2

You should talk to a lawyer with the exact words of the contract. What can or cannot be done would depend on how the current contract with you is worded. we amended my contract to be 1% of the common stock he incorporated with. Is there something written that says he cannot create more common stock and if so you would be granted 1% of all future new ...


2

This morning he told me that he was going to be diluting the stock by 100 times. That means "issuing a lot more shares of stock". Is he legally allowed to do this The Board of Directors -- voted on by the shareholders and thus controlled by the majority shareholder -- is definitely allowed to vote to issue more stock. Sign another contract for at ...


1

Shares outstanding are shares that have been issued and purchased by investors and held by them. Authorized shares is the maximum number of shares that the company is allowed to issue (according to its charter). When calculating your percentage ownership of a company, it is the shares outstanding that matters. For example, if a company has 700 shares ...


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