Dilution

Dilution is the reduction of fractional ownership of each of a company's existing shareholders by the issuance of additional shares. A common method of dilution is the conversion to common stock of other securities, such as convertible bonds or preferred stock. Dilution also occurs when new shares are issued because the company sells more shares to the public, or pays for an acquisition with shares. An anti-dilution clause may allow current shareholders to avoid dilution and preserve their fractional ownership by providing the right to buy a proportional number of shares upon any issuance of new shares to other shareholders. In many states, the anti-dilution clause, or anti-dilution provision, must be in the corporation's charter to be regarded as valid.