Ep43 Examining Bad Investment Advice

Misunderstandings

Jules van Binsbergen and Jonathan Berk clarify common misunderstandings about stock dilution. They explain that dilution is not inherently bad and depends on the conditions under which new shares are issued. For instance, if new shares are sold at a fair price, the overall value remains unaffected 1. However, if shares are issued at a discount, existing shareholders might experience a decrease in value 1. Jules illustrates this with an example where a shareholder's loss in value is due to a bad investment, not the issuance of new shares 2.

Arguing that the dilution caused the price drop is getting the causality wrong.

--- Jules van Binsbergen

Jonathan adds that in venture capital, dilution often reflects the need for additional investment to keep a company afloat, rather than a direct consequence of issuing new shares 2.

   

Voting Rights

Dilution can also affect voting rights, but this isn't always negative. Jonathan Berk explains that while owning fewer shares reduces voting power, it can be beneficial if new investors add value to the company 3. Jules van Binsbergen emphasizes that the reduction in voting rights might be a small price to pay for the increased financial value brought by new shareholders.

Sometimes it might be a good thing that you have fewer voting rights, because if other shareholders can come in and add value to the company and make you richer, that might actually be the thing that you want to happen.

--- Jules van Binsbergen

Jonathan concludes that the key is to understand the context and the potential benefits of dilution, rather than viewing it as inherently detrimental 3.