Owning less of a much larger pie does seems sensible from a monetary standpoint. It seems like you are optimizing for percentage ownership of the company instead of actual value of your stake?
Dilution is defined as the reduced ownership in a company. It is 100%, always, take-it-to-the-bank, written-in-stone bad for the shareholder who gets diluted.
Financing a company may create dilution and still put the shareholder in a better spot ultimately. For Tesla, a high-growth capital-intensive business, you can bet on the dilution part happening (they have to get the money from somewhere). The better off part is still an open question.
>Dilution is defined as the reduced ownership in a company. It is 100%, always, take-it-to-the-bank, written-in-stone bad for the shareholder who gets diluted.
No, this isn't true at all. If it were, companies would never issue new shares, since shareholders wouldn't allow it.
That's not what "dilution" means. Dilution necessarily reduces the per share value of the stock. Always. That is the definition of the word. Shareholders allow it because the company gets money in return for that dilution, which will presumably increase the value of their shares over time.
>Dilution necessarily reduces the per share value of the stock. Always.
No. This is wrong. Dilution is the reduction in percentage of ownership of the company, not a reduction in the stock price. It may reduce, increase, or leave the price of the stock unchanged depending on whether or not the market thinks the company will make good use of the incoming money.
I hate to turn this into finance 101, but there seems to be some confusion here.
Owner a has 50 shares. Owner B has 50 shares. Total is 100 shares. They decide they want to give Jim Bob some shares for his birthday. They issue 50 more shares to do so. Owners A and B have been diluted and the value of their shares has decreased. That is dilution.
You cannot increase the number of shares in a company without decreasing the value of the shares. This is a hard, mathematical relationship.
Dilution is not financing. Dilution does not change the value of a company. Dilution is bad. When someone way up this thread quipped "yeah, it's great except for the dilution" (paraphrased), that is what he meant (I think - forgive me if I misread). In other words, "Yawn. Tesla is still in business".
Everyone seems to be confusing the definition of dilution with the reasons someone might choose to be diluted.
>I hate to turn this into finance 101, but there seems to be some confusion here.
There does indeed seem to be some confusion. The problem is you're the one who is confused.
>Owner a has 50 shares. Owner B has 50 shares. Total is 100 shares. They decide they want to give Jim Bob some shares for his birthday. They issue 50 more shares to do so. Owners A and B have been diluted and the value of their shares has decreased. That is dilution.
The part where they issued new shares is dilution. But the part where they give them away, guaranteeing a drop in the price of the stock, is not.
In the real world corporations don't give stock away. They will sell those 50 shares on the open market and use the money to, say, buy capital equipment. In most cases the price of the shares will remain unchanged, because the value of the company's assets have increased by a corresponding amount. The price is absolutely not guaranteed to go down.
Issuing new shares has no more effect on the share price than raising capital through other means like borrowing from the bank or issuing bonds.
What people are getting at is that if at the same time as the dilution the market places a greater value on shares (due to what they think a company can do with the money). Then they don't necessarily have to lose value over the short term.
This is sort of silly - they're trading the new shares for lots of money, which now belongs to everyone who owns the shares. So they own a smaller share of the total company, but that company now includes itself plus $500M in new money that wasn't there before. If the company is properly priced at the moment, it's a net neutral transaction. If it's overpriced, it's great for the current shareholders.
This has thead has gotten a bit out of context. I don't have anything more to add. I was trying to explain why the original post felt the need to point out that dilution is bad for shareholders, and apparently did a poor job.
