Accretive vs. Dilutive

By: Robert Grosshandler | October 6, 2017

One of the most frequent questions we get from prospective investors is whether or not all the stock being earned by members is accretive or dilutive.  It’s a bit of a technical subject, but it’s really important to why we’re doing this, and how’s it all going to play out in the end.

At heart, what somebody is asking is “when iConsumer adds another member, and that new member earns stock, what happens to the value of the shares I already own?”.  That is, on a purely mathematical basis, is this a good thing or a bad thing?

Investopedia has an article on this, but I think it misses the point for iConsumer.

The absolute math is easy.  If you there are 100 shares issued and outstanding, and you own 1 share, you own 1% of the company.  Now, if somebody earns one share, there would be 101 shares issued, so you’d own .0099% of the company.  But what happened to the VALUE of your share.

There are three parts to our answer.

First, while usually investors focus on earnings per share to judge accretive or dilutive, we believe we need to focus on market value per share.  When a new member joins, the value of iConsumer changes.  The value of a new member is determined by the market.  We can look at what competitors’ members were valued at.  When eBates sold, each member was valued at $384.  Other competitors’ members have been valued at ~$200.

So, our thesis is that so long as the value of the stock a new member gets is less than the market value the new member brings, bringing in new members is accretive (and that’s a good thing).

Example: John joins iConsumer.  He receives 100 shares of stock, which were valued at $9 when he joined.  He then shops over the next year, and earns another $25 of stock.  If John’s membership is worth $200, we’ve invested $34 in stock to acquire and retain him.

Using the 100 share example above.  If iConsumer is valued by the market (it’s market capitalization) at $200 per share, when there were 100 shares outstanding, the market would value us at $20,000.  Your one share would be worth $200.

We add a new member.  The market would value us at 20,200.  And your one share would still be worth $200.

Second, a rising stock price reduces the dilutive effect.  Or, conversely, increases the accretive effect.  Today, a share is valued at $.09.  Next year, we hope it’ll be higher.  Right now, to attract a new member, they’ll earn 100 shares of stock for signing up and shopping.  If our stock gets more valuable, we may only have to offer 50 shares of stock, instead.

And third, we may not do this forever.  Our goal is 1,000,000 customer / shareholders.  When we accomplish that, it would be wrong for the market not to give us a much higher valuation.   At that point, we can think through the best ways to leverage those many customers, and a higher valuation.  Nothing says we have to use stock to incent our members forever.

We’ll have 1,000,000 members, all of whom are rooting for us to be bigger and better.  We should be able to leverage that in some new and wonderful ways.

 

 

 

 

 


Leave a comment