Dilution definition
/What is Dilution in Accounting?
Dilution is the reduction of a shareholder's ownership percentage that is caused by the issuance of additional shares. This is a primary concern when a business is evaluating whether to raise funds by selling stock. It is a particular concern in a closely-held organization, where the current shareholders control the business and do not want to lose control to new shareholders.
What Cause Dilution to Occur?
The dilution of an ownership percentage is usually triggered by the sale of stock to new investors. Dilution can also occur when convertible instruments (such as convertible bonds) are converted into stock, when options and warrants are exercised, or when common shares are issued if specified conditions are satisfied.
Example of Dilution
As an example of dilution, a shareholder owns 1,000 shares of a company's stock, which is 10% of the 10,000 total shares outstanding. If the company issues an additional 5,000 shares, the shareholder's ownership percentage will have been diluted to 6.66%. This could have a significant negative impact on the shareholder’s ability to influence the corporation.