Help me understand the drawback of paying with additional shares
Hi everyone,
Hope all is well with the coronavirus situation. I was having a difficult time wrapping my head around this concept: stock-based compensation/M&A deals with stock as a form of consideration both represent true costs to existing equity investors because the new shares will "dilute" their percentage ownership.
I do recognize that their percentage ownerships will go down, as the number of shares will have increased. However, my concern lies in the fact that equity value has presumably increased as well at the same time when new shares come in (which represents cash flows going up). The existing equity investors may indeed own less of a company, but the company's total value to all investors has also gone up--so how can we draw the definitive conclusion that additional shares will necessarily harm existing investors?
I know that I am probably thinking something wrong here...but please help me figure it out. I am a sophomore preparing for interviews. Thanks!
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