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is a decrease in the percentage of a company's outstanding stock represented by a fixed number of shares. Percentage dilution occurs to existing shareholders whenever a company issues shares of stock to a new shareholder. It results from the increase in the total number of company shares outstanding caused by the sale of new ones. This increase reduces the percentage ownership each share represents in the company. As a result, existing shareholders who do not purchase new shares find themselves owning a smaller percentage of the outstanding equity. For example, if management owns all 80,000 shares of a company's stock and the company issues 20,000 new shares to another investor, management's percentage ownership in the company will be reduced from 100 percent to 80 percent. Its 80 percent of the stock may be worth more than the 100 percent it owned before the new investor bought 20,000 shares, but, nonetheless, management's stock ownership has been diluted. Percentage dilution is inevitable in venture capital financings. In fact, few entrepreneurs manage to retain a majority of the stock in their company by the time it goes public. Still, 25 percent of a $50 million company with publicly traded stock is worth a lot more than 100 percent of a privately held company worth $5 million. Not only is it more than twice as many dollars, but it is also in a more liquid form, which itself adds value to the stock. The most important factor about percentage dilution is how great it is and how much money the company receives for the stock it sells. In general, for a growing company, the longer outside equity financing can be delayed, the less percentage dilution management will suffer. See: Antidilution Provisions, Dilution (Value), Fully Diluted, Going Public, Pricing, Restricted Securities.
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