The situations he describes are entirely typical, and he's right to call the founder-takes-all scenario the elephant in the room. Early employees often work incredibly hard and receive a payout that is a thousand times smaller than the founder's. I know because I've been one of those employees.
After being on the wrong end of that deal once, I've decided to never make that mistake again. I'd rather work at a larger company (where I enjoy normal hours, lots of benefits, and 3-4x more $$ of stock every year than I got in 4 years from a startup) or be one of the founders actually winning in the startup game. Right now I'm actually doing both. ;-)
From my own experience this is _exactly_ what happens. Only they intelligently manipulated my shareholder agreement in a way that I had to actually buy the options, no paper transfer, I needed cold, hard cash. Having very little money at the time (being between jobs) I was unable to do so, which meant that I forfeited my options. Probably for the best anyway, because buying them didn't guarantee a buyout, only the option of one. I would have been out $5000, just waiting for the day to be bought out, which would probably never come.
Lesson learned: read things very carefully, confusing language is intended to be confusing. I basically gave away two years of my career to kool-aid equity. Just be really careful, and if you don't fully understand something ask someone who does understand. If you can't get a direct answer, leave. Don't waist your time; you're being gamed.
Wait.. in the most typical case you are granted the option, not an option on a option. Thus if you actually exercise the option your not receiving the option of cashing out, your receiving very real shares in the company.
Was that not the case in your situation? I've seen some incredibly poor option deals (NQO options that exercised to non-registered shares spring to mind), but never the scenario you described.
This is one Techcrunch article where the comments on Techcrunch itself are intelligent. The best comments are from a guy named Jon who clarifies that fortunately we work in a free market. If enough people vote with their feet like you have, things will change. I personally think market forces have done a good job dictating the current founder and employee payouts.
This is why I laugh at all the offers from startups I often see (and a very few times get). There is no reason at all for me to work at a startup. There is no money in it, and the founders will often be unprofessional and petty, fighting each other and all that. We'd all be friends till the startup is sold, then they make millions and I make 10k.
Rather than work as an employee at a startup, I'd rather work at a big multinational (where I have the chance of rising high in the ranks).
And I'd rather work at McDonalds than be the first employee of a startup. That's like the shittiest job ever. You are on the same level as the others, you put the same amount of work, and all you get is a salary, and when the startup sinks you're out and broke.
After being on the wrong end of that deal once, I've decided to never make that mistake again. I'd rather work at a larger company (where I enjoy normal hours, lots of benefits, and 3-4x more $$ of stock every year than I got in 4 years from a startup) or be one of the founders actually winning in the startup game. Right now I'm actually doing both. ;-)