• February 2020
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The Equity Dilution Formula: Understanding the Formula

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Dilution is the reduction in the ownership percentage in a certain company as an effect of the issuance of additional shares. This happens and it is common. So, it’s alright if you’re in that boat right now. All you do is take the equity dilution formula to find the final percentage of dilution. There are a number of steps necessary for this process.

The first step to calculating the equity dilution is to calculate the dilution coefficient. The dilution coefficient is equal to 1 minus the % of shares you gave away.

Certain things will change the simplicity of the formula above. Often companies begin with more than one initial owner. When this happens a slightly extended version of the dilution coefficient is necessary. In this case, the formula changes. Take your initial stake and multiply it by your dilution coefficient plus your percentage of dilution.

There are additional circumstances that may change the equity dilution formula as well. Frankly, this is a complicated process. There is an article on my company’s blog that may help to shine some additional light on this topic: What is Price-Based Anti-Dilution Formula for Anti-Dilution Protection?

Depending on one’s math background, this formula can be a complicated process. Luckily some attorneys are good at math and specialize in this specific area of law. They understand the equity dilution formula and how to make it work for your business. If you’d like assistance being matched with a skilled equity attorney, feel free to reach out to my company LawTrades.