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When one of my clients calls me
and they want to make changes to

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their offering something that's
already taken place, and there's

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already been investors in there,
they've already contributed

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money. There's one thing that's
going on in my head, it's front

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and center that I'm always
analyzing. It's not necessarily

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something I'm always talking
with my clients about if it's

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not necessary, but it's always
the first thing I'm checking in

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my head to see if there's an
issue. Let's talk about what

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that is.

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So what is that one thing? That
one thing is dilution. dilution

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is a bad bad word when it comes
to private equity, or

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syndications or private equity
funds, or whatever it is that

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we're doing. In the investment
world dilution is deadly. And

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dilution, not only is bad for
investors, but it's also very

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bad for you as a fund manager or
a syndicator. It's bad because

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it's bad for investors, because
investors start to lose faith

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almost instantly, as soon as
they see it happening. Now, it

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may be subtle sometimes. And it
may not really be aware that

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it's even happening at all. But
ultimately, somebody's going to

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pick up that there's been a
dilution, and then there's going

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to be phone calls happening. And
they're not going to be happy

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phone calls when you don't have
the answer there. So that's why

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the dilution problem is always
front for and foremost in my

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mind, within the time we're
changing anything, because I

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don't want to have to get the
phone call of why didn't she

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tell me that that happened. And
obviously, I want my investment

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my syndicators to be extremely
successful, and preventing

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dilution, or if it dilution is
going to be happening, making

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sure everybody knows this is why
it's happening. This is the

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whole point of it. It's an OK
thing because of this, because

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that happens sometimes, too. So
let's talk about exactly what it

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is. And how it happens. Here is
a simple whiteboard of that

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describes what happens. So let's
say all of your investors are

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here. Right, you've got a whole
slew of people. And they've all

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put into your investment to buy,
let's use a piece of property as

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an example. So they've bought
into this property. And I'm

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going to tell you that the way
this comes about more often than

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not, so if they bought into this
property, now the years go by,

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it's year one, year two, year
three, I had suddenly, in year

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four, there is a big, big
problem. There is this property

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that you still have. And let's
say that there is for just

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there's 100 units, right? That
are that are being divided. So

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100% of the property is being
divided amongst the investors,

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there is a big problem. This
property is under has some

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regulatory issues. And now
suddenly, it needs $2 million

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put into it. You have a choice,
you can do a capital call and

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call up those previous investors
and say, Hey, investors, I need

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$2 million, or we're in big
trouble. Or, hey, you need $2

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million. It worked really well
braising that money before.

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Let's get a few people together
here actually, let's use a

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different color. Let's get a few
people here

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to give us $2 million. And when
it comes to that percentage,

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we're going to make it so that
these people now have 20%. And

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the blue people now have 80%. So
you see how we went from 100%

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down to 80%. That's why we use
the word dilution because it's

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suddenly diluted their value of
their property is now gone.

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That's the problem and that's
how it comes about. Now there

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are times where dilution is a
good thing. Maybe it's Something

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like, hey, look, we actually
need this $2 million. Because

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we're going to realize a gain of
400%. If we raise that

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additional $2 million, if we
don't do it, it's going to be

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worth 100% of what its original
value is, that's a good reason

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to say, hey, look, we're going
to dilute. But the reason we're

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diluting here is by bringing in
$2 million, and new investors

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can bring it in to. So it also
can be from you as part of a

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capital call, you could also
bring in that value. So if if my

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current investors only bring 1
million, I can bring in 1

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million from the outside world.
But the reason is, because we're

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going to have this huge gain,
everybody's happy. If it's

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communicated that way. And
that's the truth, then you're

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not going to have the same angry
phone calls. But this is how

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dilution happens. So how do we
work around it? Well, you can

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work around it a few ways. You
can say to your your people,

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hey, look, we've got this thing
we could do a capital call. The

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most common way to deal with
this exact situation that we

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have here is to say, okay,
they're going to take $2

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million, we're gonna we need
that $2 million to be raised.

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But we're gonna do it as debt.
We can't do it any other way.

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And so we're going to raise it
as just pure debt. And then

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we're going to pay that back at
some rate. That way, then 100%

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of the equity is still owned by
the blue people. There's no

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dilution, and we go our way.
That's dilution and how it

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happens. So you can see why
whenever there's a change,

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that's the immediate thing that
I'm thinking about, is their

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dilution air. How do I prevent
it? How do I work around it if

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there is a dilution. So let's go
through the key takeaways from

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this topic of dilution. Number
one, equity dilution because

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that's what we're really talking
about is equity diluting it

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happens when the company or the
syndication or whatever issues

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new units, reducing the
ownership stake of the existing

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investors and value of their
units. This process is all is

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only used for raising that
additional capital. But if it's

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not done right or explained to
them, right, your investors are

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gonna be furious and calling you
on the phone. Number two, the

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stake value can decrease due to
a lot of different factors,

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including performance, financial
health market conditions,

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understanding how those our
external factors as him impacts

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it, it's important in order to
manage the investment

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effectively, and make sure that
those dilutions aren't

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happening. Number three, the
share dilution can impact your

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existing shareholders by
reducing their overall reward so

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that the distributions that
they're entitled to their

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percentage of equity, therefore,
it's crucial that you understand

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exactly how they're structured,
what that percentage of

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ownership is, and be prepared,
if there is going to be a change

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in that percentage of ownership
that you get in front of it and

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explain it well. Lastly,
navigating this share dilution

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issue requires an understanding
not only of the impact of the

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equity, just the dilution, but
also balancing the desire to

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basically have your assets grow
in a way that gives a positive

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thing like in that example,
where the with the 400% and

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making sure that it's
communicated in a very clear way

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to your investors, and listen to
what their opinions are.

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Because, boy, if there is a
perceived dilution problem,

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emphasis on problem, you've got
a big problem. And that's just

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the kind of thing you don't want
at the end of the day. My name

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is Tilden Moschetti. I am a
syndication attorney for the

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Moschetti Syndication Law Group.
If we can help you with your

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Regulation D offering under Rule
506b and 506c, we'd be happy to

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talk with you and talk about
what you're working on.

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Ultimately, we want all of our
syndicators and fund managers to

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be as successful as possible to
help them grow from where

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they're at today to whatever it
is, whether it's a billion

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dollar hedge fund, like we've
done for other clients, or

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whether it's just you want to do
multiple deals for friends and

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family. We'd be happy to be part
of your journey and can

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definitely show you the way give
us a call or look at our website

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and sign up for a consultation.
And let's see if I can help you