This is a question about private, VC-funded, growth stage companies. It seems to be a new trend to allow early employees to sell some of their shares when the company does a new funding round. For example, the company might issue new preferred shares totalling 5% to a new investor, but also "convert" 5% of the existing common shares owned by employees into preferred, and let employees sell those to the same investor. The theory is that (a) the investor gets that big 10% stake that they "need" (b) the company can tell itself that it's only taking 5% dilution (which is not really the case, I think) (c) early employees get some cash at the fancy, preferred price, almost always at a big premium on their common share strike price.
Is this a good idea or is the company better off just creating 10% new preferred shares and selling them directly to the investors?