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is an accounting concept. It refers to the difference between what an investor pays for his shares of company stock and their book value immediately after the transaction. Whenever an investor pays more than book value for his shares he suffers value dilution. Assume, for example, that an investor buys 20,000 shares at $10 per share when 80,000 shares are already outstanding and the book value of the company is $50,000. The investor's $200,000 investment will be added to the $50,000 to increase the company's book value to $250,000. Dividing the company's new book value by the number of outstanding company shares gives the per-share book value. In this case, the $250,000 book value divided by one hundred thousand shares (the investor's 20,000 plus management's 80,000) gives a per share book value of $2.50. The investor who paid $10 per share suffers a $7.50 per share value dilution. At the same time, management's shares experience an increase in book value from $.62 per share ($50,000 divided by 80,000 shares) to $2.50 per share. Venture investors expect value dilution. They know that book value is only one method of measuring a company's worth and that, in most cases, it is a conservative measure. Most investors are more interested in the fair market value of the shares they purchase and the company's prospects for success. See: Antidilution Provisions, Dilution (Percentage), Fully Diluted, ROI (Return on Investment).
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