Spolu 20: Share Dilution

Previously, I mentioned that investors lose a small percentage of their holdings in a spolu every year (I recommend about 5%). If there are no new spolu shares being created, the relative holdings between the investors do not change. Their relative earnings from their spolu profit distribution would not change as their number of shares decrease.

But losing spolu shares for no reason seems contrary to principles of free enterprise. Allow me to make a few points on this matter.

But let’s assume this scenario. A spolu started up 10 years ago, which was financed by seed capital of original investors. After two years, the spolu put out its first profit distribution and has not missed a distribution since. The original investors have made their money back and 50% more. Now, the spolu wants to expand its operations and is looking for outside investors to fund that expansion.

But in the last 10 years, the original investors had their holdings reduced by about half. This dilution of original investment would make it easier for the spolu to find new investors for the expansion. The new prospective shareholders would see more reward for their investment if the legacy shareholders share less in the future returns. This makes finding the expansion funds more likely. The original investors would likely be better off with their diluted holdings and the expansion…