What does dilution refer to in a corporate finance context?

In a corporate finance context, dilution specifically refers to the reduction of ownership percentage that existing shareholders experience when new shares are issued by the company. When a startup or corporation decides to raise additional capital, it may do so by offering more equity, which increases the total number of shares outstanding. As a result, the ownership stake of existing shareholders is diminished because their proportionate share of the company is reduced.

For example, if a company has 1,000 shares outstanding and an investor owns 100 shares, that investor holds 10% of the company. If the company issues an additional 1,000 shares, bringing the total to 2,000 shares, the investor's ownership would drop to 5%, despite still owning the same 100 shares. This concept is crucial for investors to understand, as it impacts both valuation and voting power within the company.

The other options do not accurately capture the essence of dilution. An increase in stock value refers to a positive change in share price, which is not connected to the concept of ownership reduction. Increase in debt obligations pertains to the company’s liabilities, while growth of company revenue relates to income generation rather than the ownership structure.