Jack launches a startup, incorporates it and issues 1M shares, all of which go to him since he's the sole founder. He approaches VC firms for funding and a firm agrees to fund the startup in exchange for 30% or 300K shares. Does this money go to Jack (since he owns the shares)? Shouldn't it go to the company?
How does this work exactly?
In reality it's a bit more complicated because VCs employ a swindle called an "options pool", but that's not the issue in question here.
PG runs through a simple example of how this works in his How to Fund a Startup essay: http://www.paulgraham.com/startupfunding.html