The price (from $2M value to $4M value)at which First Meriam(lender)
would invest more money in Marvin (entrepreneurs) was not fixed in
advance.  But Marvin could have given First Meriam an option to buy
more shares at a preset price.  Would this have been better? Why?

Offering a fixed price for further share issues is dumb, unless you
get the cash up front - like selling Convertables.
- or you have no choice

Unless 'Marvin' is running some sort of a scam, if things take off the
last thing he wants is to dilute his shareholding.

This (and your other post) sound as if they come from some sort of
pseudo case history, in which case any response will be based on
'common sense' rather than the detailed predicates in your text book.

Crudely put, if you have a winner finance it on loan stock.
If you can't get that then surrender as few shares as possible.