How to Calculate Equity Dilution

Equity dilution may lower the value of your shares.

Equity dilution may lower the value of your shares.

Equity dilution occurs when a company that you own stock in issues new shares, thereby reducing the percentage amount of the company that you own. Sometimes, such as if the company is using the new shares to pay employees, your shares will end up being worth less. However, that's not always bad, because the dilution could be due to purchasing outside assets with the stock (such as during a merger), or to bring in additional investors, such as if the company is a start-up or needs extra cash. To figure the dilution, you need to know how many shares you own, how many shares were outstanding, and how many new shares were issued.

Divide the number of shares you own by the amount outstanding before the new shares were issued to find your original ownership percentage. For example, if you owned 100 shares out of 500 total shares issued, you own 20 percent of the company.

Calculate the number of shares outstanding after the new shares are issued by adding the new shares to the existing shares. In this example, if the company issues an additional 125 shares to bring on a new investor, add 125 to 500 to find the company now has 625 shares outstanding.

Calculate your new ownership percentage by dividing the shares you own by the number of shares outstanding after the new shares are issued. In this example, if you own 100 shares and now the company has 625 shares outstanding, divide 100 by 625 to find you now own only 16 percent of the company.

Subtract your new equity percentage from your old equity percentage to find your equity dilution. In this example, subtract 16 percent from 20 percent to find you own 4 percent less of the company than you did before.

Tip

  • Just because your percentage has gone down doesn't mean the value of the shares has gone down. Continuing the example from the steps, say your 100 shares were worth $10,000, or $100 per share. If the new investor brings in an additional $12,500 of investment for his 125 new shares, your shares will still be worth $100 each.
 

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