Things to consider when investing venture capital

Becoming a venture capitalist requires lots of money, as start-up companies look to this source of financing as an alternative to business loans and other forms of debt. So naturally the first step is to acquire access to a large amount of funding either via personal wealth, financial leveraging, or business collaboration.

Venture capitalists combine investment capital with business knowledge to yield potentially soaring returns on their money. Anyone with financial know how can become a venture capitalist, but to be a successful venture capitalist involves a few important variables. This article will discuss those variables and also provide tips that can be useful to existing and future investors and venture capitalists alike.

• Raising Capital

For venture capitalists who are still not venture capitalists, but want to become venture capitalists takes financial savvy and business astuteness. One can either start out small turning over investments every few months with increasing profits or successfully influence a benefactor that one's venture capital choices will yield a better rate of return than any of that benefactor's current investments. Other sources of venture capital include savings from employment, capital gains from investments or loans from private sources.

• Business Valuation

Valuation of businesses is a key part of any venture capital investment. Venture capitalists must know how much a business is worth, especially if a majority ownership position is being taken in the company. To properly value a business involves forecasting, analysis of financial statements, understanding economic and market conditions such as supply and demand, regional variances in costs, logistics, asset management structure and so forth. Essentially each operation within the business should be assessed from bottom to top to arrive at a fair market and/or negotiable price per share in a business.

• Risk Assessment

Since many new businesses fail within the first 5 years of operation, a statistically verifiable risk exists with most if not all venture capital investments. Such risk involves competition, capitalization, managerial problems, overhead costs, marketing concerns and any unique factors specific to the type of business. For example, if the new business involves a recent technology, determining if all the bugs been worked out or if a high percentages of sales will return for warranty maintenance can have an impact on both business brand equity, labor costs and working capital management. Knowing and accurately predicting these things can help reduce the risk of a venture capital investment.

• Investment Strategy

Investment strategy comprises all the necessary steps utilized in achieving the long term objective of garnering an optimal return on one's investment. Investment icons such as Warren Buffett and George Soros and Richard Branson are all very skilled and knowledgeable business investors whose investment styles can be used as models for any venture capitalist seeking to model one's strategy on that of the professionals. Furthermore, investment strategy is the model by which investment success can be achieved. Such models may include factors such as entry strategy, exit strategy, negations terms, assessment of both ownership and managerial integrity among many other financial considerations.

• Tips for Becoming a Venture Capitalist

1. Know how to walk away. Some deals are just bad, not worth more time or money than is available and are doomed to fail. If one has already invested by the time such knowledge comes to bear, failing to not hesitate could cost more than one would like to lose.

2.  Develop a financial third-eye. All good investors have a business sense, a financial intuition and a know how to see an opportunity before the majority of other investors see the same opportunity. If one already has the business third eye, then develop it through knowledge, if one doesn't have it, learning to simulate it may help.

3.  Don't Panic and Persevere: If things don't always go according to plan, don't worry, even the best investors lose from time to time.

4. Dedicate: Over investing or speculating can cause one to lose site of one's investment goals. Keeping the eye on the ball and only investing in things one is completely sure about, confident in and knowledgeable about can make a difference.

5. Pay Attention: Missing important details and distractions can be all it takes to turn an investment sour. Since business is about profit, small oversights in profit margins, cost estimates and other forecasts can make the difference between a capital gain, a flat investment or capital loss.

Venture capitalism may sound fun and exciting but there is some skill to it. Simply throwing money around into businesses is one thing. Investing for maximum capital gain is another. Skilled venture capitalists like and know what details are important and maximize on them. The above information and tips illustrates some of the key variables used by and inherent to venture capitalists. Becoming a venture capitalist may take time especially if one is starting from the bottom, but it is achievable.

The eifference between debt and equity financing

Companies use debt and equity financing to leverage capital expenditures, project development and operational expansion. Without leveraging company's financial growth is limited to retained earnings. For this reason debt and equity financing are often times considered vital to business expansion. Both debt and equity financing have advantages and disadvantages associated with them. This article will illustrate both forms of financing then come to a reasoned conclusion as to when and why each form of financing can be valuable.

Debt sources of financing

Debt financing includes collateralized bonds, debentures, business loans from banks, and lines of credit. Generally debt financing comes with an interest rate somewhere between 3-8% depending on the type. For this reason debt financing can be less expensive than equity finance depending on the expectations of the equity financiers. Debt financing may not always generate enough capital to perform intended business projects and goals as this type of financing tends to be more conservative in its lending requirements.

Equity sources of financing

When using equity as a source of financing a company is seeking capital from investors through the issuance of shares. These shares can be common or preferred i.e. having voting rights or priority in the case of company liquidation. Equity financing can also take the form of employee stock options which replace direct pay in the form of a corporate benefit. In the case of common and preferred shares, equity financing can be variable based on stockholder expectations and type meaning the higher the expectations, the higher the cost of financing.

Advantages and disadvantages of debt and equity financing

In business, both debt and equity financing have their advantages. Debt financing from financial institutions is subject to formal approval from lenders and monitored by organizations that rank the quality and credibility of corporate bonds. For this reason, debt financing can not only be a source of cheaper leveraging, but also an indicator of how viable a projects and goals actually are in terms of how convinced lenders and analysts are about the quality of the debt.

On the other hand, in a competitive market place, venture capital and equity financing can mean the difference between innovation, market share and a competitive edge. Often, such ventures can have more risk and therefore demand more return on investment making the financing more expensive. Nevertheless, if a business can garner a return on capital greater than the cost of goods and services including equity costs, then those projects become profitable.

Depending on the type of business, competitive ventures requiring excessive equity financing may simply be unnecessary, impractical or not in accordance with the goals of the business owners. In other words, not all businesses are designed to rapidly expand and yield growing profits on an annual basis. Businesses that simply intend on yielding a steady profit on an annual basis may benefit more from debt financing because of its structured and cost effective nature.

In the case of Equity financing, businesses that lack credibility, start ups and rapidly expanding businesses however may make positive use out of equity financing not only because it may be the only source of capital around but because it can provide the leverage necessary to accomplish the corporate vision.

Summary

Financing is a form of leverage not uncommon to most businesses in one form or another. Smaller businesses tend to use less, fixed or no equity financing due to corporate goals, cost of financing and business size. Contrarily, large high-powered industry leaders and high growth firms may find it essential to raise capital through equity financing to accomplish annual forecasts, corporate goals and owner objectives. Each form of financing has its advantages and disadvantages as this article has illustrated, but in the end financial leveraging is something that may be required for business survival and profitability regardless of cost.

What Debentures Are

Debentures are financial instruments used to raise capital that offer borrowers the chance to finance their business without forfeiting control of company ownership. Issuers of debentures are typically either government agencies or businesses, and debentures are also referred to as bonds. However, these types of bonds are' un-collateralized' i.e. not secured by collateral assets, making their success in generating funds largely dependent on the credibility of the issuer, and the return on investment to the lender.

• Purpose

Debentures are an alternate source of capital investment financing. They may however, be used alongside other types of financing to better suit the borrowers goals. For borrowers debentures help finance projects, business expansion and operational objectives that are believed to contribute to their organization's financial success. Lenders partake in debentures because they can receive a stable growth of investment in the case of high-grade debentures, while also hedging risk from other investments such as stocks.

• Terms

The borrower and lender terms of agreement that circumscribe the bondholder's rights are called 'indentures'. These are legal loan contracts that define how the debentures will be paid back, the time by which this will happen, how the debentures will be beneficial to the lender and any other requirements, restrictions, waivers etc. that the involved parties agree to. The process with which debentures are issued and sold is called underwriting; in some cases this process may involve third parties such as investment banks.

• Interest

Interest rates or borrower costs vary considerably with debentures but can be as high as 25% or higher.(3) The indenture, financial solvency of the issuer, and the market in which the debentures are exchanged influence the rate debentures yield. Essentially, the higher risk the company and the more restrictive the indenture is, the greater the interest rate should be to compensate for the accompanying risks to the lender.

• Types

Several types of debentures exist, not all of which are available for consumer investments.(1) Agency debentures are government debentures according to Investopedia, whereas corporate and convertible debentures are issued by companies; the latter of these can be converted to equity i.e. shares. Not all debentures are subject to the same lender obligations, an example being subordinated debentures that do not give priority to the debenture holder in the event of corporate insolvency.(3) Other types of debentures include redeemable and mortgage debentures.(5)

• Benefits

The benefits of debentures may include both a high and relatively low risk return on investment (ROI) for lenders depending on the type of debenture. In other cases, the interest paid by the debenture may be fairly low as is the case with several types of Government debentures. Mutual funds that invest in bonds may offer investors an opportunity to invest in debentures that would otherwise be inaccessible. The benefits for corporations generally assume an Internal Rate of Return (IRR) that is forecasted to be higher than the cost of the debenture(s) in addition to achieving business developmental or operational goals.

Sources:

1. http://bit.ly/9Vdpsy (Treasury Direct)
2. http://bit.ly/8Zy8YH (Investopedia)
3. http://bit.ly/d7lTAl (Mojo Law)
4. http://bit.ly/ax7dYP (Small Business Administration)
5. http://scr.bi/bdqA1z (Scribd)

Sources of Investment Capital During Business Down-Cycles

During a business down-cycle, investors are more likely to be cautious and weary of business opportunities requiring investment capitalization including personal business financing. This is because it is more likely than not business revenue is in a down trend thereby increasing the potential of locking money into stagnant or negative returns. Of course not every business deal is that simple and opportunities to make money in down markets do exist or can be offset by higher medium to longer-term capital gains.

• Investor specialties

Conservative investors are the least likely to be  willing to invest during a business down-turn. Angel investors or venture capitalists with a taste for risk and an eye for potential are better prospects. These kind of investors can be found independently or through consulting firms such CB Insights and may have conditional business sectors and objectives in mind.

• Utilize an underwriter

Investment underwriters can bring experience, and contacts that would otherwise be inaccessible when searching for willing investors during a lull in business activity. Private and public investment underwriters can help business owners and managers navigate regulatory requirements and  investment products to better suit capital infusion objectives and managerial goals. Investment banks can be found through referrals or public open directories such as DMOZ.

• Consider mezzanine capital

Mezzanine capital adjusts the type of financing in a way that may be preferable to investors willing to invest during periods of lower cash-flow. This is because mezzanine financing may give investors greater income earning opportunities through higher rates and expanded options such as convertible bonds with high interest rates.

• Emphasize low risk

If investors are afraid to invest because of a lack of business credit history or limited financial performance, low risk debt instruments may be the way to go. Low risk investments give investors first priority in terms of debt repayment arising from corporate insolvency and may also provide a fixed rate of return to the investor seeking to achieve more diversification.

• Utilize business network

Business networks that can tap into private financing can be a way to avoid lengthy bank lending procedures. These investors may offer a more private investment with alternative negotiation options. For example, an investment may include a less tangible collateral such as a client network or a free consulting expertise.

• Exhibit financial strength

One of the strongest way to find willing investors during a business down-cycle is having a strong business to start with. Moreover, a good business model that has a proven track record should have a reasonable chance of obtaining investors even during a recession. This type of investment capital is driven by earnings consistent growth and favorable growth forecasts.

Finding willing investors during a recession can be more challenging during the low end of a business cycle. Nevertheless, with strong proposals, and a proven business model, finding investors during a periods of less revenue doesn't have to be impossible. Naturally the healthier a businesses financial position is, the easier it will be to attract investment. Even so, fixed rates of returns and appealing loan terms combined with the investment acquisition techniques in this article can help facilitate business capitalization.

Sources:

1. http://bit.ly/aFUKV2 (CB Insights)
2. http://bit.ly/dt1mjl (Investopedia)
3. http://bit.ly/9alG2j (DMOZ)

How Your Attorney Can Help You Fund Your Business

Attorneys who are skilled in formation of new businesses and have experience working with people in businesses can be an invaluable aid in locating capital for a start up business. The reasons attorneys can be useful in this process is not only their legal know how, but also their research skills, and contacts. A few of the ways which attorney's may be able to help in the financing of new business are as follows:

• Shareholders

Some businesses require shareholders to come into existence. Attorneys who have incorporated other business' in the past may know other business owners who are willing to become a shareholder for a nominal fee and a stake in profits. What's more the lawyer(s) may be familiar with equity investment groups and/or other organizations actively involved in small business financing.

• Venture capital

Venture capital investors usually seek out smaller corporations to invest in because of their potential for growth. Attorneys with strong networks in the business field may be aware of venture capitalists and/or investors willing to contribute funds to the newly formed corporation.

• Non-Profit and tax exempt corporations

If a business is started up as a not-for profit, religious or other tax exempt organization it may be eligible for Government subsidizing. Attorneys skilled and knowledgeable in the incorporation process of these types of business may also be able to assist in the government financing process.

• Bank loans

Bank loans for small businesses can be complicated and sophisticated. Legal assistance in the application procedure can help iron out important questions the bank may have regarding solvency, collateralization and investment protection criteria in the loan application procedure.

• Payment plans and pro-bono services

Since the hiring of an attorney often can be a significant expense, those attorneys may be willing to assist in the start up of a new business out of their own interest of getting paid. This interest could take the form of deferred payment, payment plans or even pro-bono services. Talking to an attorney about these things before incorporating or registering a small business may help in determining if the lawyer(s) and/or law firm is willing to provide any type of assistance in the matter.

• Financing sources

There are many sources of financing, some of which are more difficult to locate than others. Corporate attorneys who know about start up businesses and financing of these businesses may also have knowledge of alternative financing sources for new businesses as the start up costs for such businesses are often considerable. For example, the lawyer(s) may be knowledgeable of the United States Small Business Administration programs available to new business owners and may be able to assist in obtaining financing from that program and others like it.

Attorneys are more than just the people who help new business owners file paperwork and register companies. They are also skilled and knowledgeable persons who in some cases have great experience and ability in the business field. Adept, connected and experienced attorneys may possess the key that will enable a business owner to follow his or her dream and not only form the right kind of company but obtain the right kind of financing.

How Vendors Can Help You Fund Your Business

Vendors have a vested interest in the success of their clients and thus are likely to be supportive or understanding of clients' financial needs. This aspect of the vendor/client business relationship positions vendors in unique positions to assist with financing business cash-flow and working capital needs.

Since vendors are also suppliers of wholesale products and in some cases are also franchise shareholders of businesses, there may be several ways by which they may be able to help finance a business. The following illustrates types of client/vendor relationships, how those relationships can influence financing and the various methods of financing assistance vendors can provide.

Franchise vs independent business

Vendors may also be franchise partners or owners meaning their stake in the business' performance is considerable in terms of capitalization, supplying, managing and branding. For example, McDonald's franchise owners are subject to licensing requirements held by the franchise supplier i.e. McDonalds Corporation. The terms of that licensing relationship may include explicit financing assistance and/or terms.

In the case of independent businesses, the relationship with vendors may not as strong but still important. If a business has had a long standing relationship with a vendor that vendor may be more than willing to assist with financing in a number of ways. Depending on the size of the vendor and the nature of the business, they may even have their own banking division.

Vendor financing methods

• Advertising 

Vendors are companies too, therefore any advertising a client business can offer the vendor is worth money to the vendor. In return for certain advertising, vendors may offer deals which may include but not be limited to financing arrangements, discounted supplies and/or favorable business terms.

• Loans 

Large, heavily capitalized, nationwide vendors may also own financing companies that act as subsidiaries in the interest of the parent corporation. An example of a financing subsidiary and/or shareholder relationship is GMAC financial services as owned in part by General Motors Corporation. In the case of GMAC, financing is and was made more available to vehicle buyers and vehicle sellers when the need arose. Vendors with or without ownership in financing firms or subsidiaries, may be willing to assist in offering loans and/or capital for financing a business not only as a profit venture, but as a means by which to facilitate the vending, distribution and sales of their primary business of supply.

• Equity Investment 

A vendor corporation may also be interested in becoming a shareholder or partner depending on the type of business the client operates. This allows vendors both greater influence in the managing of a business, but also a potentially mutually beneficial business relationship in which the business owner becomes better capitalized, and the vendor acquires profit potential and/or greater continuity in vending supply.

• Supply Terms 

If a company uses a cash basis of expensing, money becomes due upon receipt. In the case of inventory on a cash basis receipt, this can involve significant up front expenses. Due to this, many suppliers and/or vendors offer credit accounts in which payment is made after delivery of a product. These terms may be negotiable in terms of interest, time periods and wholesale prices.

• Business network 

Vendors themselves may acquire financing from banking and/or venture capital investors. If the vendor has confidence in a particular business, they may be able to provide a referral or recommendation for either loan or capital financing.

The vendor/client business relationship can be a strong one. It is for this reason that vendors may be unique sources of potential financing of a small business. Depending on the extent and type of the business relationship a client and vendor have, there are several mechanisms by which financing can be achieved. These methods of financing include but are not limited to direct financing, service barter, negotiation of business terms, capital and/or equity investment and financing referral.

Financing a New Business With Personal Savings

Depending on the business, utilization of personal savings as a source of financing can be achieved in a number of ways. Before going into more specifics however, it is important to note that capital invested in a business is locked in that investment until it is either withdrawn and/or yields a profit. For this reason it is advantageous to utilize one's capital in supplementation of one's business instead of sole capitalization.

The following illustrates a three-step process by which personal savings can first be maximized for optimal leveraging and application through employment of financial instruments and institutions. Second, the financing obtained in step one can be further optimized by properly applying the funds as necessitated by considering the type of business. Then, in the final step, the business itself can be operated using overhead expense management techniques that minimize start up operating costs.

Step 1- Financial leveraging

The goal here is to take a sum of money and turn it into a larger sum of money through financial instruments and business tactics. As soon as money has been invested in a business it can't be used for anything else until it yields a profit. For this reason it may be a good idea to leverage the capital before investing it in anything. A few such leveraging methods are as follows:

Business Plan Collateralized Loans: Non-secured loans don't require collateral, but rather a good business plan. The fact a business owner is willing to put his or her personal savings on the line is the first step in this business finance plan as it demonstrates the willingness to invest personally. If the lender finds the business plan achievable they may loan money without collateral thereby once again allowing the business owner to not use up the personal capital.

Small Business Seed Grants and Capital: Seed grants and/or capital may be available to entrepreneurs with demonstrated capacity to attain probable cash flow in a new business. Furthermore, depending on how strong the business model, idea and plan are, the seed capital may not require repayment in the case of a grant or have low interest rates in the case of seed capital.

Loans on Investment: If savings are invested, those funds can earn a percentage in interest and/or capital gains, and also be used as collateral for additional financing. This way a business owner isn't actually using his/her money. What's more, the returns from the investment may pay off all or part of the interest on the loan. One may also be able to obtain partial collateralization in which the savings allow one to borrow double, triple or even more than the original capital at hand.

Step 2-Maximizing capital through business type

Online lending business:

Companies such as www.prosper.com allow lenders and borrowers meet outside the confines of traditional loan application procedures and interest rates. If one wants to start a lending business, this may be a good place to start as individuals and investment groups come together and arrange loan deals for interest rates in excess of 8%.

Multiple owner business:

Many investments in businesses are made by groups of owners and/or investors. This enables the owners to pool their money and achieve more. By starting a business with multiple owners one is in effect leveraging one's own capital with the capital of others. In this case personal savings are the entry fee to a potentially profitable business.

Community based business:

If a business is to be operated with the goal of assisting certain social, community or religious needs the financing for such operation may be provided for by a parent organization. Examples of this include churches, state and federally sponsored privatization programs and fundraising organizations for social causes. While the business may not earn huge profits, it may return a stable living and with little or no start up cost.

Step 3- Overhead expense management

To reduce investments costs and operating expenses one may also utilize overhead expense management techniques. These techniques allow one to

Consignment Inventory: If the business involves inventory of any kind, it may be possible to negotiate a consignment or partial consignment with the wholesaler. Not only does this allow the business owner the opportunity to return some or all of the goods if they aren't sold, but it also doesn't require outright purchase of the inventory. This method of inventory saves the wholesaler inventory storage overhead costs and frees up savings/capital for other uses.

Space Utilization: Rent and/or building costs can be a very large expense for a business. For this reason it is advantageous to avoid this expense altogether by either working from home, finding an operating location outside the city and/or sharing space with a other businesses or soliciting space at discounted prices. Space utilization may require relocating but the pay off could mean a great reduction in monthly expenses.

There are many other expenses and methods that can be implemented to supplement and/or make the most of one's personal savings when starting a new business, The above steps are just a few of the possible approaches to starting a small business with use of one's personal savings.

How An Accountant Can Help You Fund Your Business

Accountants can help fund a business through their fiscal organization skills and knowledge of accounting systems, methods and techniques. Since much of their profession revolves around financial reports, analysis and comprehension of financial data, there is a good chance they will be adept at maximizing the use money, knowledgeable about where to find money, and skilled in avoiding excessive and/or unnecessary expenses related to taxation, costs and budgeting. Some of the methods an accountant may utilize are clarified as follows:

Fiscal resources

Accountants may be skilled is the issuing and funding of low cost debt financing such as debentures and indentures, in addition to equity/venture capital, and possibly community, municipal, state and federal sources of financing that may or may not come with discounted and/or favorable financial caveats and terms.

Tax management

If a business is new or pre-existing, the probability is an accountant may know ways to organize the business finances in such a way as to reduce taxes. This in turn keeps more money available for future and/or present use within the business. Examples of such methods include re-incorporation, income relocation, and legal tax shelters such as tax deferral, capital gains conversion and good use of taxable income deductions.

Debt restructuring

Since many companies operate with some form of debt this can have implications on operating margins, taxation, leveraging and interest payments. Balancing these business items to optimally increase retained earnings, corporate growth and profit margin is something accountants are more likely to be good at than the human resources department for example. Moreover, through low interest financing, debt expensing techniques and non-taxable equity financing a business may be able to organize its debt financing so as to beneficially increase overall cash flow and/or profit margins.

Capital integration

Capital integration is the management of a business' capital investments. Financing from owner investment, external organizations or sources, and retained earnings are all capital. How this capital is used within the business determines how well it can perform in terms of acquiring additional sources of financing, inspiring confidence in the businesses' financial statements, obtaining the most product and/or service for the lowest cost etc. In other words, making the most of capital by optimizing its use through cost reductions, application on financial statements and attaining new capital or debt financing is an additional ability accountants may possess.

Audit control

Since certified accountants are unique in their ability to provide professional audits i.e. inspection and certification of accuracy of a business' financial records, having such audits performed can be beneficial to a businesses financing indirectly. Audits by reputable accountants and/or accounting firms inspire confidence in businesses record keeping which in turn can facilitate improved capital investing. Also, since business tax returns may be re-audited by a government tax and revenue service, having a company's financial records pre-audited may allow for a more expedient tax return.

The techniques and examples provided above outline a few of the ways accountants can assist in the funding of businesses. Accountants are often equipped and able in numerical, and financial management of business fiscal concerns. This capacity can enable accountants to assist in the development and implementation of helping businesses find and generate funding for project development, operations and other business ventures.

Understanding Stock Dilution

Stock dilution refers to loss of common share value caused by an increase in the number of units of a company's equity ownership. As more stock become available to shareholders and potential shareholders, each share of ownership holds a smaller piece of the company via dilution. Dilution occurs because the total amount of available wealth becomes distributed over a wider number of shares. Just as whiskey becomes less concentrated when water is added, so too does wealth when ownership is added.

Stock dilution can be measured in several ways. One such measure of stock dilution is diluted earnings per share that is calculated by dividing profit by all shares that are classified as, and could be classified as common shares. Another method of measuring stock dilution is by dividing the total market capitalization after a new stock offering by total outstanding shares. Market capitalization is the total number of shares outstanding multiplied by the number of shares.

Method 1: Diluted Earnings Per Share (DEPS)
DEPS= Gross Profit / Common shares + potential common shares
Ex. $10,000 / 1000 + 100 convertible shares
=$ 10,000/ 1,100 = $9.09

• Dilution via share conversion causes a .91 cent adjustment in share value.



Method 2: Capitalized value per share (CVPS)
CVPS= Total common stock x price per share + new capital/ Total Shares
= Market capitalization + New Capital/ Total shares
Ex. 1,000 x $10.00 + $1000 / 1100
= $11,000 / 1,100 =$10.00

• Calculation does not lead to diluted value using exact same numbers as method 1.

It is evident from the above two methods, new shares can be framed to demonstrate dilution or no dilution depending on whether profit or capital is used in the formula. For investors, the better of the two methods of calculation would be method one because it is profit that is distributed to shareholders not investment capital.

The advantage of increasing the number of shareholders is an increase in capital available to a company. For example, suppose ABC Company seeks to initiate a new project that is estimated to yield 10% return on Investment. To raise the capital to embark on the project ABC company issues 100 new shares. The company now has more potential to earn via increased capital meaning a portion of present value is exchanged for potential value.

The disadvantages of stock dilution occur in the short-term when investors perceive an immediate loss. In other words not only is their wealth diluted, but their risk of ownership increases because there is no guarantee the company's new project will lead to an increase in profit margin under the increased ownership. Should the project yield a greater return than the current earnings per share, then the diluted earnings per share would be higher than the earnings per share before dilution and with pre-project profit margins.

Sources:

1. http://bit.ly/adMdy4 (Massachusetts Institute of Technology)
2. http://bit.ly/bva95I  (Investopedia)