How will Blue Apron, the meal kit delivery company, deploy the funds it raises from its IPO later this year? This is a fundamental question potential investors should ask of any equity offering.

In the following segment from Industry Focus: Consumer Goods, senior Fool.com contributor Asit Sharma tackles this question and offers a warning to early IPO investors regarding potential dilution.

A full transcript follows the video.

This video was recorded on June 6, 2017.

Asit Sharma: I will add another red flag onto some of the nice ones that you listed, Vince. If you read the proceeds section, so how are they going to use these funds, basically the company has a working capital deficit of about $84 million. That means they don't have enough of their current assets on hands to fund obligations that are coming up. So they're going to use most of the proceeds to fund that. They also have a revolving credit line, which, even after the period that they were reported on in the first set of financials within their statement, there's always a section called subsequent events, they've tapped their credit lines. The credit line now that they have, they've used $125 million out of $175 million. I've seen different figures for how much will be raised in this IPO. But pretty much, the company is saying, "We're going to use almost all of our proceeds to pump cash in, because we're sort of underwater on a current basis, and then we're going to pay off on this revolving line." There's not much else that the proceeds will be used for, so if you're thinking, "I'm going to buy shares and they're going to use my funds and other people's funds for more of this product innovation, marketing, which Vince talked about," that won't happen in this offering. 

One more red flag to put in there -- the company, as I said, good side, smart management has raised a lot to fund the company. The bad side, if you're an incoming investor, they tend to like convertible preferred stock and convertible promissory notes. So there's about $260 million on the balance sheet, $63 million of that which doesn't show up, again, until a subsequent event, just happened last month in raising money which can later be converted into shares. That will dilute this first tranche of investors coming in on the IPO. Bottom line is, if you're thinking of buying into Blue Apron, just know that they are probably going to follow this up with another offering. Typical time frame is one to three years. They'll go to the markets again, and you'll get diluted. 

But there's some appreciation potential in here as well. They're a market leader. As Vince said, there's a lot to like. If you have some risk tolerance, you can take an investment now and hold on, and you may be compensated for that risk of dilution by an appreciating stock. They do have a competitive advantage right now. Competition, I'll let Vince talk a little bit about that, isn't so fierce. But I do worry about a larger competitor like an Amazon eventually coming in.

Asit Sharma has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.