Dilution

Ownership is a pie. You start by owning 100% of it. It is divided into 20 million slices. They’re there; you just can’t see ‘em. Each is a share of ownership in whatever.com. One day, the CEO of whatever.com decided she wanted to buy her hated competitor, something.com for two million shares. Then she wanted to buy her marketing vendor, sellmybuttoff.com for a million shares.

Her stock had been trading at $12 a share for a total market valuation of $240 million. That's 12 times 20 million. But then, after printing three million more shares to buy her competitors, she now has 23 million slices of pie. And yes, that’s how it works. Companies can essentially just go to the xerox machine and print shares of their own stock that they didn’t formerly own.

But now she has 23 million shares outstanding, not 20 million.

So at $12 a share, the stock market is valuing her company at a meaningfully higher price; 12 times 23 million is 276 million. It’s saying that the value of the three million share dilution she took in buying something.com and sellmybuttoff.com was the difference between 276 million and 240 million…or 36 million bucks.

But say the market value stays flat at $240 million. Now, with 23,000,000 shares, the stock is only worth $10.43 a share, instead of the previous $12 a share. In other words, shares have been diluted…each share of whatever.com is no longer worth as much as it used to be. That pie isn’t looking quite as appetizing now.