> a small startup that never found product-market fit. The economy was bad, and they were running out of money, and they took - as I understood it - a dubious Series B led by a dubious investor
The unfortunate reality is that if a startup cannot survive for long on its own, the economy is bad, and investment interest is low - then past invested effort from founders and employees and money from early investors is a sunk cost. They have together created something with almost no independent economic value.
The later investors can buy the assets created so far at near zero cost (the alternative is a bankruptcy auction). They can reasonably argue that the future value of the business is all from their investment, together with a deal to hire the founders and current employees to invest future effort into it.