If you're an employee that received options and the company is doing another round of funding, should you be worried or on the front foot about finding out what will happen to your options?
Founders generally have the same class of stock as employees (common stock), and so are in the same boat.
Investors have preferred shares. Preferred shares have a few special properties, but the most important is ‘liquidation preference’, meaning they’re first in line to get their money out if things go wrong. Sometimes investors have a right to a multiple on their money back: twice their money would be a 2x liquidation preference.
One thing to ask about in the case of a company that has raised money on convertible notes. Since they haven’t actually sold equity, but only debt which will later convert equity, it’s worth asking if a given stake is before or after those notes convert.
Generally, if things are going well, dilution isn’t worth worrying about. In any case, the founder will be just as diluted as any employees, so their interests are aligned.
Just to clarify...
People who are just learning about this stuff (and many who aren't) learn about dilution and think it's total bullshit, get concerned about how much they're being diluted, feel like they're being stolen from if there's a dilution event, etc etc etc. The idea, however, is that if you're being diluted it's because someone wants to give the company money, and that's usually because the company is growing. Your piece of the pie will shrink but if your execs know what they're doing the pie will grow more than your piece will shrink and you will come out ahead in the end.
Bill [Gates :)] comes in and convinced Joe and Mary to sell him 50% of company for $1,000,000.
Joe and Mary issued 2 more shares (4 total shares now) and gave them to Bill in exchange for $1,000,000.
OMG, Joe and Mary just diluted themselves in half to 25% each!
But the difference is of course is that each share now cost $250,000.50, instead of previous $1.
Not quite - Another extremely important point is ensuring that there isn't a hidden type of equity/option ("Series FF" or alike) sitting above you as an employee. In this situation founders are less aligned with you as an employee as they get the option to cash out rather than being diluted in follow-on rounds. This is a mechanism designed to align founders with investors by causing founders to shoot for the moon even through appealing exit offers, but has the side effect of allowing them to stop caring and not exit until it's too late (they've got theirs, after all).
Founders and employees do not get to reinvest. Typically, when a VC-funded company is allowing employees to buy more equity is the last time to take that deal (it means the company is cash-poor and in bad shape). General rule: unless you're a founder, avoid taking the other side of any deal with VCs in it.