In my experience it's very rare for employees with vested stock to get ripped off in an acquisition. Usually the amounts involved are so small that it would not be worth the bad publicity.
Curiously enough, one of the consequences of the rise of YC-like investors is that it will no longer be so easy to pull the sort of trick you claim Oracle pulled. We get common stock, so you can't screw the common sharedholders without screwing us, which most people would think twice about.
That, single handedly, has to be one of the strongest reason I could ever think of someone wanting to work for a YCombinator company. In particular, because YC doesn't take very large portions of the common stock, they wouldn't be able to leverage their position into a "Consulting Fee" agreement with the acquirer, so their _only_ recourse is the documentation surrounding the common.
You can rest assured that if you put your 4+ years into a YC company, and it gets sold while you are no longer with it, your interests and YCs will be aligned. With a YC company, your vested common stock actually _means_ something when you leave the company. (Or, at least it means you and YC will get screwed equally - and as PG rather ominously said, that is something "which most people would think twice about." :-) )
I respectfully disagree with PG on how rare it is for employees who've left a company to get zeroed out or severely diluted compared to the ongoing-employees in an acquisition deal. I've heard enough anecdotes to convince me it is far from "very rare."
Like O'Shaughnessy said: "You’ve got to be in it to win it."
Nit: Some employees vest stock. Some vest options. Companies are different. I've been in a multitude of startups. Two were stock, one was options. For example, the current startup grants restricted stock units.
It happened to me twice. Maybe I'm just bad at picking companies. :D The frustrating thing was the silence, once they'd decided to screw people over. All of a sudden HR is incapable of answering email.
It happened to a friend of mine (almost exactly the way 'ghshephard spelled out). In fairness, partly because of hearing that story, I didn't buy my vested options when I left my last startup; those options paid out when the company was later acquired.
Was this is US-based company? The way I understand ISOs in the US, they must be exercised within 3 months of leaving the company ("The option may be granted only to an employee [..], who must exercise the option while he/she is an employee or no later than three (3) months after termination of employment" -- http://en.wikipedia.org/wiki/Incentive_stock_option).
Yes; you pay money to exercise the options and receive restricted stock. That's the thing I opted not to do, because friends of mine who did so at another large VC-funded success story got ripped off.
Happened all the time in the 1st dot com boom/bust. See fuckedcompany.com, history of ArsDigita, etc. Not sure if it happens anymore. Seems like companies nowadays exit quickly or never, so maybe the issue doesn't arise. If it's a fire sale I'm not sure what the company can really do - the acquirer is going to dictate the acquisition terms.
I think that things like Second Market have the same effect. Because suddenly you risk not just screwing former employees, but also institutional investors, with large legal staffs.
Something similar but less severe happened to me with AirWave, an IdeaLab company, which got bought by Aruba in about 2007, after I left. The company had been through several rounds of expensive failed strategies and ensuing financing in the years before I joined, and so the stock option grants to the employees were quite small, as a percentage of the company. Some of the details are a little fuzzy in my memory now, but I did get paid for my shares: something like a month or two worth of the salary I'd earned during the three years I was there. (I think I wasn't fully vested, but mostly.)
The employees still at the company received substantial retention bonuses. The only one of these bonuses disclosed in the purchase papers I signed was that the president got an additional bonus of perhaps a year's salary, but later other employees told me they got substantial retention bonuses, too.
I don't feel like I got "screwed", exactly. I was a bit disappointed in the quantity, but it was a big improvement over what happened with KnowNow, where I never got back any of the US$6000 or so I spent to exercise my options, as the company's successive VC-approved management teams gradually mismanaged the company into bankruptcy.
It happened to about half the people I work with when we got acquired a few years ago. Options, stock, everything the non-C-level people held was worthless. A lot of unhappy people and a few left over it, even some with single-digit employee numbers. Me, I always asked for a salary increase instead of options and it's worked out great so far. I would think different though if I was in early on something with more upside.
Curiously enough, one of the consequences of the rise of YC-like investors is that it will no longer be so easy to pull the sort of trick you claim Oracle pulled. We get common stock, so you can't screw the common sharedholders without screwing us, which most people would think twice about.