Does anyone have any thoughts on stock dillution? Dillution is when a company sells additional shares of stock (such as through employee stock options or convertible bonds). My first thought is that it is kind of like stealing from the existing shareholders.
Well, no, when a company issues stock to its employees it's a form of compensation.
Let's say a company has 1000 shares outstanding and the market values the shares at $10 each. The market cap of the company is therefore $10000. If the company issues 250 shares of additional stock to it's employees, the share price will likely fall to about $8. (1000+250)*8=10000.
Now let's say that instead of issuing stock, the company simply pays its employees a total of $2000. Well, in this case the market cap will fall by $2000, so instead of $10000, the market cap will be $8000. With 1000 shares oustanding, the share price will fall to $8, which is the same outcome.
OK, yeah. That's a good point.