What is the stock dilution between partners

Why is stock dilution legal?

Here's another point of view:

Suppose you and I were 50-50 partners in a small business. Say we wanted to grow our business, but that took money. Someone (let's call them Warren) has the money we need and therefore an equal share of the business in return for the money we offer Warren.

ie all three of us now own 33% of the shares. For you and me, our share was reduced from 50% before Warren's entry to only 33%.

While this reduction in our stake may seem like bad business for us at first glance, we both agreed to deliberately not give Warren his stake out of altruism, but because it made good business sense to help us expand.

Ergo, what matters is not just your share of the cake, but also the size of the cake self! Therefore, under certain circumstances, it can make sense to dilute the stake.

Two little points:

(a) This in no way indicates that the dilution would be useful got to . Just that it sometimes Can make sense

(b) In the case of a large company, of course, they don't need yours personal Consent for the dilution. But hey, they also don't ask you when to buy a new line or start a new product.

lvella

All of the answers helped me build the mental model to understand (and accept) how this works. But I accept this because it seems like the easiest way to get the idea across, and that's how I'll explain it myself if I'm ever asked about it.

Malvolio

It might be easier to remember when you bet numbers on it. Curious Cat and lvella each own 50% of Acme Products, a $ 100 company. So everyone has equity of $ 50. Now Warren comes in and invests $ 50 so give him 1/3 of the company. Cat and Ivella were also watered down to 1/3 but now Acme Product is worth what it was before, plus the $ 50 it received from Warren, so $ 150, and the original investors' equity is still worth $ 50! Of course, the company could be worth more (because it's better capitalized) or less (because there are more chefs in the kitchen).

curious_cat

Many Thanks! This was my very first post on Money.StackExchange :) I'm glad I was able to help.

Prinsig

Do curious cats and Ivella have to raise the shares for Warren alike? Could odd_cat keep 50%, reduce Ivella's stake to 25%, and give Warren 25% without permission?