Implementing share plans—ways to manage dilution of existing shareholders
Implementing share plans—ways to manage dilution of existing shareholders

The following Share Incentives practice note provides comprehensive and up to date legal information covering:

  • Implementing share plans—ways to manage dilution of existing shareholders
  • What is share dilution?
  • Example of share dilution
  • How do shares become diluted
  • Dilution limits
  • Why do companies wish to avoid dilution?
  • Business asset disposal relief (previously entrepreneurs' relief) and dilution
  • Types of share awards and dilution
  • Reducing dilution by avoiding newly issued shares
  • Share option pools
  • More...

What is share dilution?

Share dilution happens when a company issues additional shares in itself. As a result the existing shareholders' ownership in the company is reduced—or diluted—when these new shares are issued.

Example of share dilution

A small business has 100 shares in issue. It has ten shareholders all owning ten shares each and therefore each shareholder owns 10% of the company. The following year, the company issues another ten shares (this can, for example be either directly to a single investor or to satisfy an option which a share plan participant has exercised over ten shares). There are now 110 shares in issue, and each of the 11 shareholders now own ten shares each. These ten shares now only represent 9% of the company. In this way, as a result of the company issuing an additional ten shares in itself, the existing shareholders are diluted from 10% ownership to 9%.

How do shares become diluted

Dilution to existing shareholders can be caused in various ways. The most common causes of dilution connected with the implementation and operation of share schemes, include the issue of new shares as a result of:

  1. options being exercised by option holders and satisfied using newly issued shares

  2. the issue of new shares directly to employees and/or directors, and

  3. the creation of a share pool for the benefit of employees where the shares

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