What is Dilutive Financing?

Dilutive financing refers to a type of funding that results in the issuance of additional equity or securities, which can potentially dilute the ownership or control of existing shareholders. When a company engages in dilutive financing, it typically raises capital by selling additional shares or granting stock options, convertible debt, or other securities that can be converted into equity in the future.

Here are a few common examples of dilutive financing:

  1. Equity Offering: An equity offering involves issuing new shares of common stock to investors in exchange for capital. This can be done through initial public offerings (IPOs), follow-on offerings, or private placements. By selling additional shares, the ownership percentage of existing shareholders is diluted as their ownership stake becomes a smaller proportion of the total company.
  2. Convertible Debt: Convertible debt is a form of financing where a company issues debt instruments, such as convertible bonds or convertible notes, that can be converted into equity at a later stage. When the debt is converted, it results in an increase in the number of shares outstanding, potentially diluting the ownership of existing shareholders.
  3. Stock Options and Warrants: Companies often grant stock options or warrants to employees, investors, or other stakeholders as a form of compensation or incentive. These options or warrants give the holder the right to purchase shares of the company’s stock at a predetermined price. When exercised, additional shares are issued, which can dilute the ownership of existing shareholders.
  4. Rights Offerings: Rights offerings allow existing shareholders to purchase additional shares at a discounted price. While it provides an opportunity for current shareholders to maintain their ownership percentage, if some shareholders choose not to exercise their rights, their ownership stake can be diluted by the issuance of new shares to those who participate in the offering.
  5. Follow-on Offerings: Follow-on offerings occur when a public company issues additional shares of its stock in the secondary market. This can be done to raise capital for various purposes such as expansion, acquisitions, or debt repayment. The issuance of new shares in a follow-on offering can dilute the ownership of existing shareholders.