That's certainly one version of what can happen. Another version is that none of the equity transfers to the new company. The acquiring company will offer you a modest boost in salary and similar new stock options. If you don't take the offer because they're low balling you or you don't like the new company, your old company will terminate you at the end of the week without any severance. Or the new company will offer everyone on the team 3 months consulting contracts. Either way, better start familiarizing yourself with COBRA.

Employees in the acquired company are put under heavy pressure to take whatever deal is offered. Who wouldn't want to keep working with their friends? The CEO's/senior team will keep the employees out of the loop so that rank-and-file don't move first and take any negotiating power away from the CEO.

Not every acqui-hire is a payoff for the employees in the acquired company. It can also be a face-saving gesture when money runs out to make a shutdown look semi-successful for the founders.

And you will get tired of deleting all the job offers and "let's have coffee and talk about my startup" mails for the next few days until you find something new.

Truly, having your company fail is a horrible thing, at least in Silicon Valley right now. :)

And this is why I just don't get this aqui-hire craze. You can buy the founders, sure, but unless an employee has equity or you throw some real cash at them why would a rank and file employee stay? If I wanted to work at XYZ corp (especially if XYZ corp is big enough to acquire the startup), then I would have sent a resume to XYZ corp in the first place.

What a company is buying in an acqui-hire is not just individual capability, but also team chemistry and cohesion. The team has proven that it can work together effectively to ship a great product. They're acquired (and given appropriate salaries + retention packages) to do the same for the acquirer.