I don't know how this works, but my question is, on a funding round, couldn't the C suite just allocate themselves additional equity in proportion so that their total value remains the same?
They could, but the shares represent value - and that money needs to come from somewhere. Simple, but extreme example: A company is valued at 10 million gobbledoks, and the C-Suite holds 10%, representing 1 Million valuation. Now the company takes 10 Million gobbledoks Investment that end up in cash on the companies bank account. This raises the the valuation to 20 Million.
Under simple dilution rules, the Investor takes 50%, and the existing shareholders are diluted to 50% of their stake - the C-Suite owns 5% of 2 Million, 10 million as before.
If the C-Suite demands that their equity proportion remains at 1%, they’d suddenly own a stake representing 2 million valuation. That difference needs to come from somewhere.
