When closely held or new shares are issued for public sale by a company that has already completed the initial public offering process. Dilutive shares are usually offered with the aim of refinancing or raising capital for expansion, whereas nondilutive shares are usually sold with the aim of financially benefiting the stockholder making the offering.
After a company has completed its IPO, it may choose to offer another round of new or closely held shares to either existing shareholders or the public. This process is referred to as a secondary offering. The ways in which a secondary offering progresses may be characterized as either dilutive or non-dilutive.
Dilutive secondary offerings (also referred to as follow-on or subsequent offerings) allow the public to purchase newly created shares. By contrast, non-dilutive secondary offerings feature the sale of a large portion of securities by one or more significant stockholders. Because non-dilutive secondary offerings involve the sale and purchase of existing shares, this process does not dilute the strength of shares held by existing stockholders. When new shares are created during a dilutive secondary offering, the strength of existing shares diminishes.
Say that a company has 1,000 shares of existing stock. In a non-dilutive secondary offering, a major shareholder sells 300 shares of stock. When these shares are purchased, the company still only has 1,000 shares of stock in circulation, so the strength of each share remains the same. If a company has 1,000 shares of existing stock and then sells 1,000 additional shares of stock in a dilutive secondary offering, the strength of existing shares will decrease by half as the total number of shares in existence doubles.
Executive One: “I think we should find a way to finance the construction of an on-site bowling alley, trampoline park and all-you-can-eat buffet for the office.”
Executive Two: “Awesome. Why don’t we set up a secondary offering?”