But what if I offer 1 share for 1% and then sell myself a billion new shares, diluting that 1% down to practically nothing? I'm sure this would be regulated, but it seems if something like this needs to be regulated then it indicates a flaw with the system. Why can't we just give out percentages, and have that percentage stay constant?
I can't tell if this is rhetorical question or not. But I'll answer as if it was serious.
First of all, a company can do whatever it wants. So if you control a company, you can give out percentages. That's your prerogative. In reality, you wouldn't want to ever do that, because it would eliminate your ability to:
- Raise additional money.
- Hire new employees.
- File for an IPO.
- Merge with another company.
- Purchase another company.
However, if you want to start a company with a few friends, and never take additional money, and never expand beyond the founders, and never sell or merge, then you can certainly structure it in a way that each founder has a fixed percentage of shares. But that would be a very unusual business.
So, assume you hold 99 shares and your employee holds 1 share. If you sell yourself 1B shares for $100, you'd be obligated to offer your employee ~10M shares (10101010, I calculate) for $1. If he accepts, your employee would continue to own 1% of the business.
In the case of common shareholders, the opportunities for redress are substantially less.