What is Antidilutive
Antidilutive is a term that describes the effects of actions such as securities retirement, securities conversion or corporate actions (such as acquisitions made through the issuance of common stock or other securities) on the earnings per share (EPS) or voting power of existing shareholders.If an activity is antidilutive, it maintains or increases the voting power or EPS for existing shareholders by lowering the company's outstanding share count or increasing the company's earnings.
A second use of the term antidilutive refers to ownership rights, whereby existing shareholders in a certain class of shares have rights to purchase additional shares when there is a new issuance of securities that would otherwise reduce the ownership percentage of existing holders. This is called an anti-dilution provision. This ability of existing shareholders to purchase additional shares helps them maintain their proportion of outstanding share ownership, therefore maintaining their share of the voting power or receipt of the company's EPS.
BREAKING DOWN Antidilutive
Although most commonly used in reference to convertible securities whose exercise would have the effect of increasing EPS, the use of the term "antidilutive" has become much more comprehensive. It refers to any action that helps an existing shareholder to maintain or increase their voting power or receipt of the company's EPS.
For example, let's say Company A has five existing shareholders who each own 10% of the company. If Company A were going to issue more shares to gain new shareholders, the existing five shareholders would see their 10% ownership stake shrink as more owners bought in. This is known as dilution. If Company A had an antidilutive policy, they would need to offer the existing five shareholders the ability to buy more shares to maintain their 10% ownership in the company.