Dilution
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Dilution is devaluation of shares as a result of emitting new shares to raise money:
As an example imaging the following start situation: Round A Share price \$1,00
| # Shares | Percentage of total | |
|---|---|---|
| VC | 4.000.000 | 38,1% |
| Total | 10.500.000 |
Scenario: "Company does well": Round B Share price \$5,00 Money to be raised \$20.000.000 Shares to add to pool 4.000.000
| # Shares | Percentage of total | Value of shares | |
|---|---|---|---|
| VC | 4.000.000 | 27,6% | \$20.000.000,00 |
| Total shares | 10.500.000 | ||
| New shares | 4.000.000 | ||
| New total | 14.500.000 |
In this scenario there is some dilution but it is 'profitable'. The VC will be happy.
Scenario: "Company does bad": Round B' Share price \$0,10 Money to be raised \$20.000.000 Shares to add to pool 200.000.000
| # Shares | Percentage of total | Value of shares | |
|---|---|---|---|
| VC | 4.000.000 | 1,9% | \$400.000,00 |
| Total shares | 10.500.000 | ||
| New shares | 200.000.000 | ||
| New total | 210.500.000 |
In this scenario there is huge dilution and not profitable. VC will be unhappy.
