Diluted, yes. Eliminated, no. See other comments in this thread about the "cliff" -- once you're past it, it's harder to get screwed over.

There are an infinite number of ways that common stock (and the associated options) can be rendered worthless in acquisition or winding up a company.

Simplest way is to sell the company for enough to pay off preferred shareholders, and use "personal service contracts" to compensate insiders. They get paid well, shareholders get zero.

Most of them would not stand up to a lawsuit, but if you suddenly have no money coming in, are you going to be willing to pursue an expensive, years long legal process?

It's likely those investors have liquidity preferences anyways. In a fire-sale situation that equity is likely worthless.

I don't find this distinction very useful, and I disagree that it's harder to get screwed over. It's in fact, just as easy.. we're only talking about degree. I think your argument is that instead of your shares being worth zero, they can only be diluted to any positive real number... which brings me little comfort.

There is a distinction.

With dilution the founders, who are more likely than you to have a say in what happens, are also likely to suffer that dilution. However in the incident that happened the founder didn't lose a dime.

Can't the founder be issued a bunch of new shares as part of the dilution? (I mean in theory, not in this specific case.)

In theory, yes. However in practice you generally need signoff from other investors, who are unlikely to be supportive.