Shares in employment solutions app developer Reffind Ltd (ASX: RFN) entered a trading halt prior to the market open this morning. Management requested the halt in order to provide an announcement about a pending capital raising – expected to be released today or tomorrow – with shares resuming trade on 13 April at the latest.

Reffind is just the latest tech wannabe to be raising capital, with Newzulu Ltd (ASX: NWZ) in an extended suspension pending its capital raising, and Rent.com.au Ltd (ASX: RNT) releasing its fundraising prospectus to the market last week.

While it’s as yet unknown exactly what form Reffind’s capital raising will take, many similar fundraisings can result in a big hit to existing shareholder’s stakes. Take Rent.com.au’s fundraising, which will raise around $6 million yet increase the number of shares on issue by a third. The pie gets bigger, but each individual shareholder’s slice gets significantly smaller – unless they’re willing to tip more money in, which may not be an attractive option given the speculative nature of Rent.com.au and similar.

At its most recent half-yearly report, the company burned $2.7 million in cash (leaving $4.4 million remaining) over the prior 6 months.

Doing the math

If the company can’t start generating a significant amount of cash soon it will be back tapping shareholders in the next few years.

There are other ways to raise cash, including selling a chunk of new shares to ‘sophisticated’ investors (who often haven’t previously held a stake in the business), and this can be even more detrimental to shareholders.

A winning prospect?

As I wrote recently here and here, tech stocks are often sold off heavily as investors look at a company’s cash balance and evaluate the likelihood of a discounted capital raising. Even former market darlings like 1-Page Ltd (ASX: 1PG) are not immune to investor pessimism about cash flows, and these kinds of companies are not suitable for investors who lack a cast-iron stomach. On the plus side, patient investors can sometimes wait for a company to raise capital, and then pick up shares at a significant discount.

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Motley Fool contributor Sean O'Neill owns shares of Newzulu Ltd and Reffind Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.