Out of curiosity, what did the cap table look like when they suggested that? Was there a good chunk of equity floating around your current/former employees?
I know some VCs have dilution/ownership thresholds and they might have been trying to find a way to get in on your raise without bending their own rules. But it is really offensive to your employees, I know if my company did that I would walk.
Ok, I will say this: this was a former entrepreneur at a very high profile perceived-brand-as-tier-1 guy running the independent capital investment arm of a very high profile company.
I know some VCs have dilution/ownership thresholds and they might have been trying to find a way to get in on your raise without bending their own rules. But it is really offensive to your employees, I know if my company did that I would walk.