After an initial public offering (IPO), the value of an investor’s holdings in a company might be diminished if the company issues additional shares of stock. Dilution is analogous to slicing a pie into smaller and smaller pieces, with no overall effect on the pie’s size but a noticeable effect on the value of each individual slice.

Although the effect may be comparable, dilution is not the same as a loss in market value. When the market drives down the price of a stock, it’s typically because of broader industry trends like falling revenues or weaker-than-expected sales. Dilution occurs when a corporation takes deliberate action that reduces the value of its common stock for purposes of Section 409A.

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