Q: As forward stock splits create further dilution, why would a company want to split?
Forward splits (e.g., everyone gets 2 shares for each 1 share they have now) do not create dilution (nor do reverse splits). Shareholders (and optionholders) receive more shares during a forward split.
Why would you do this?
- Gets share price down, for public companies. Still an issue today. Apple at $1000+ makes each share hard to buy for smaller investors.
- Match a typical IPO share price, pre-IPO. Start-ups still like to IPO around $15-20 per share, plus or minus. This gives room for a “pop” and a share price still well under $100. If your private, pre-IPO share price is say $40, then a 2-for-1 forward split will get that down to $20, with the same economics for each shareholder and employee.
- Optics, for private companies. Just having more shares sometimes really can help. A VP might feel better getting 100,000+ shares. A Director 10,000+. If you have “too few” shares, especially after the Series A-B+ phase, a forward split can help here. It’s optics, mostly. But how folks feel about a grant does matter. It’s hard to know what, if anything, your startup options will be worth. Having more of them makes some folks feel better. Even if the effective ownership is the same, because the denominator is also larger.
If you do a forward-split for optics, to let everyone have more shares, you just need to make sure you don’t split them too many times. If you do, then later you’ll have to do a reverse split … and folks will feel like they have fewer shares.
A good corporate counsel can help you work through this.