Dilution in bad faith is lawsuit-worthy. Most founders these days have common stock just like everyone else, and get diluted in the same situations.
Dilution during fundraising isn't an absolute bad thing, either. There are shenanigans, and investors with preferred stock definitely get paid first, but the basic theory is that 20% equity dilution comes along with an investment that immediately makes the company 20% more valuable. It's basically a zero sum transaction ... except for preferred shares, options pools, etc.
"Most founders these days have common stock just like everyone else, and get diluted in the same situations."
True but given the vast differences in allocations that may turn their theoretical 100s of millions into dozens of millions while turning employee shares from a "really, really good bonus" into "not worth the transaction fees".
It's also easier to defend your stuff when you are sitting in the board room.
I've seen it happen to former employees at previous companies; once I even asked at a meeting if anything was being done about their massive dilution and the CEO gave a prepared spiel that was pretty close to Paul Graham's piece about how VC's like to wipe out angels: http://www.paulgraham.com/startupfunding.html#f9n
Dilution during fundraising isn't an absolute bad thing, either. There are shenanigans, and investors with preferred stock definitely get paid first, but the basic theory is that 20% equity dilution comes along with an investment that immediately makes the company 20% more valuable. It's basically a zero sum transaction ... except for preferred shares, options pools, etc.