Dilutive vs. Anti-Dilutive: An Overview

Publicly traded companies can offer either dilutive or anti-dilutive securities. These te🍸rms commonly refer to the potential impact of any securities on the stock's earnings per share. The fundamental concern of existing shareholding after new securities are issued, or after securities are con🍒verted, is that their ownership interests are diminished as a result.

It isn't just shareholders who are concerned about dilution of EPS through the exercising of securities. Both accountants and financial analysts compute 澳洲幸运5官方开奖结果体彩网:diluted earnings per share as a worst-case scen𝄹ario when evaluating a company'ᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚs stock.

Dilutive Securities

Dilutive securities are not common stocks initially. Rather, most dilutive securities provide a mechanism through which the owner of the security can obtain additional common stock. This mechanism can be either an option or conversion. If triggering the mechanism results in a decreased EPS for existing shareholders—by increasing the total amount of 澳洲幸运5官方开奖结果体彩网:outstanding shares—then the instrument is said t♋o be a dilutive security.

Some examples of dilutive securities include 澳洲幸运5官方开奖结果体彩网:convertible preferred stock, convertible debt instruments,⭕ warrants, and stock options.

Anti-Dilutive Securities

Not all security mechanisms result in decreased EPS, and some even increase EPS. If securi🍨ties are retired, converted or affected through certain corporate activities, and the transaction results in an increased EPS, then the action is considered to be anti-dilutive.

Some security instruments have provisions or ownership rights that allow the owners to purchase ad✅ditional shares when another security mechanism would otherwise dilute their ownership interests. These are often called anti-dilution provisions.

Though not a security, the word "antidilution" is sometimes applied to acquisitions of one company by another through the issuing common stock, when the 澳洲幸运5官方开奖结果体彩网:value-added throu🌠gh the acquisition offsets the new shares such that total EPS is increased.

Dilution Protection

Shareholders typically resist dilution as it devalues their existing equity. 澳洲幸运5官方开奖结果体彩网:Dilution protection refers to contractual provisions that limit or outright prevent an investor's stake in a company from being reduced in later 澳洲幸运5官方开奖结果体彩网:funding rounds. The dilution protection feature kicks in if ꦐthe actions of the company will decrease the investor's pe🐎rcentage claim on assets of the company.

For example, if an investor's stake is 20%, and the company is going to hold an additional funding round, the company must offer discounted shares to the investor to at least partially make up for the dilution of the overall ownership stake. Dilution protection provisions are generally found in 澳洲幸运5官方开奖结果体彩网:venture capital funding agreemeཧnts🦩. Dilution protection is sometimes referred to as "anti-dilution protection."

Similarly, an anti-dilution provision is a provision in an option or a 澳洲幸运5官方开奖结果体彩网:convertible security, and it is also known as an "anti-dilution clause." It protects an investor from equity dilution resulting from later issues of stock at a lower price than the investor originally paid. These are common with 澳洲幸运5官方开奖结果体彩网:convertible preferred stock, which isꦿ a favored form of venture capit📖al investment.