What is meant by dilution in the context of equity ownership?

Dilution in the context of equity ownership specifically refers to the decrease in an existing shareholder's ownership percentage when a company issues additional shares of stock. When new shares are issued, such as during a funding round or an employee stock option plan, the total number of shares outstanding increases. This leads to a proportional reduction in the ownership stake of existing shareholders since their previously held shares represent a smaller fraction of the overall company.

For example, if a company originally has 1,000 shares owned by shareholders, and it issues an additional 500 shares, the total number of shares becomes 1,500. An existing shareholder holding 100 shares now owns a smaller percentage of the company (100/1500 = 6.67%) compared to before the new shares were issued (100/1000 = 10%). Therefore, dilution impacts ownership percentages directly by increasing the number of shares, leading to a potential decrease in individual influence or claim to profits and assets of the company.

The other options do not accurately reflect the meaning of dilution in equity ownership. For instance, a reduction in company profits and a change in debt ratios are unrelated to ownership stakes and instead pertain to the financial performance and leverage of the company itself. An increase in share value also