I often read about a startup company diluting its shares, in order to provide additional shares for an investor during an investment round. This means that the ownership % for the co-founders is reduced during the investment round. I assume that this is necessary because 100% of all shares have already been issued to the co-founders and employees, and so there are no shares left over to give the investor.
But an alternative would be to only issue some of the shares to the co-founders and employees (e.g. 70% of the shares), so that there are still shares remaining to give to future investors (30% of the shares, in this case). This way, the co-founders' ownership % does not decrease during each investment round, and this might be easier to manage (if, for example, the co-founders always want to have more than 50% of equity).
Why do companies tend to do dilution, rather than reserving a portion of shares for future investors?
