First see dilution. Recap: dilution is bad. If you have a nice glass of lemonade and put a bunch of ice in it, eventually the lemonade will start to get watery...a.k.a. diluted. (Science!) If you own 50% of the shares of a company with 1 million shares outstanding and the company issues 1 million more shares, you'll own only 25% of the company. (Finance!)
Consider dilution from the eyes of an entrepreneur: the eventual goal in any company is to create wealth for shareholders. In the beginning, the founder owns all of the "wealth" or at least the shares in the company. Over time, that founder gives away pieces of the company in the form of shares to investors (in exchange for money). The problem is that the more shares the founder hands over, the less of her own company she owns.
An anti-dilutive act is anything the founder does to stop this problem. For example, she might buy back some of her own shares. Example: Some companies are anti-dilutive from the start, especially if they don't need a ton of money to get started. Yahoo! required only a little over $1 million of total capital until it reached break even. It chose to take on more capital because it believed that the dilution was worth the incremental capital raised so that it could take advantage of market opportunities. eBay was about the same.
The great fortunes of the Internet era were made in part because the founders suffered so little dilution that, at the end, they had tens of billions of dollars of wealth via their large percentage ownership stakes in the companies they founded.
Related or Semi-related Video
Finance: What is Dilution?77 Views
finance a la shmoop. what is dilution? ownership is a pie.
here's 100% of pie. it's divided into 20 million slices, there there you just [man holds pie]
can't see them. each is a share of ownership in the company whatever.com
well one day the CEO of whatever.com decided she wanted to buy her hated
competitor something.com for 2 million shares. then she wanted to buy her
marketing vendor sell my butt off.com for a million shares. well her stock had
been trading at 12 bucks a share for a total market valuation of 240 million
dollars .see we get that 12 times 20 million. but then after printing 3 [equation]
million more shares to buy her competitors,
well she now has 23 million slices of pie .and yes that's how it works!
companies can essentially just go to the Xerox machine and print shares of their
own stock, that they didn't formerly own. but now she has 23 million shares [printer prints shares]
outstanding and not 20 million. so at $12 a share the stock market is valuing her
company at a meaningfully higher price. 12 times 23 million is 276 million. it's
saying that the value of the three million share dilutions she took in
buying something dot-com and Sell my butt off.com [woman waves to camera]
was the difference between the 276 million in the 240 million or 36 million
bucks. but let's say the market value had stayed flat at 240 million. well now with
23 million shares out the stock is only worth 10 dollars and 43 cents a share,
instead of the previous $12 a share. in other words shares have been diluted
each share of whatever com is no longer worth as much as it used to be. that pie
isn't looking quite as appetizing now is it? [man frowns in kitchen wearing apron]
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