share dilution

You know that feeling when your mother's rice used to serve four people generously, and now the same pot has to stretch for eight because more relatives showed up unannounced? Nobody took your portion away directly, but somehow your plate looks smaller than it used to.

That is share dilution in one sentence. It happens when a company that already has shareholders decides to create and sell new shares, whether to raise fresh money, pay staff bonuses in stock, or bring in a new investor. The company itself has not shrunk. In fact it might now have more cash than before. But the total number of shares has grown, so each existing share now represents a thinner slice of ownership, profit and voting power than it did yesterday.

Say a small Lagos tech startup has 1,000,000 shares outstanding, and you own 100,000 of them, which is a comfortable 10 percent. The founders then bring in a foreign investor who puts in fresh capital in exchange for 250,000 new shares. The company now has 1,250,000 shares in total. Your 100,000 shares have not moved, but your ownership has calmly slipped from 10 percent to 8 percent. You still hold the same number of shares, yet you now own less of the whole.

This is not always a bad thing. If the new money helps the business grow faster than the dilution shrinks your slice, you can end up richer even with a smaller percentage, because the pie itself got much bigger. It is only painful when a company issues shares carelessly, or when insiders dilute everyone else to reward themselves without adding real value.

Diaspora investors buying shares on the Nigerian Exchange or on platforms like Bamboo and Trove should always check a company's history of issuing new shares before buying in. A firm that dilutes its shareholders every year, without much to show for the extra cash raised, is one to watch closely.