"The company can issue new shares at any time leading to dilution."

Yes, but the directors of the company are obligated to act in the best interest of shareholders, so hopefully they would do that iff it increases the value of existing shares. (OK, there are many things wrong with this, including the fact that option holders are not shareholders.)

"If the company does extraordinarily well, you will do well also."

Yes, but if the company does very (but not extraordinarily) well, you might end up with nothing.

"If you are making a significant contribution to that success, a rational company will want to reward you and incent you to stay with more options."

But your contribution may not be constant. An early engineer who took a risk (low salary, high chance of being laid off) and built the prototype may not fit in when the company grows, so there may be little rational incentive to treat her fairly.

"obligated to act in the best interest of shareholders". Obligated how specifically?

Also, all shareholders, or the majority?

Obligated by law: deliberately acting against (some) shareholders interest is a criminal offense.

So my interpretation is: this is good for shareholders.

Can you give me examples of people in jail for this 'crime'? At worst people saw social network, and it seemed a ok.

My understanding is that options for common shares, such as terms at YC, have not even anti dilution protection. So the # you have is a snap shot, and nothing to do what that % would be when you fully vest.

people holding options are not shareholders until they exercise those options.

Excellent point, but equally important is the fact that even if you purchase your < 1% of shared, if you are a regular middle class person, you will probably have no real legal recourse to sue if you get screwed. The investors who are most likely behind it will cover their asses and so far outgun you legally that it is probably hopeless to try to fight even if you have the means.

This is where the GGGP (davidwihl) is both right and wrong—knowledge of the cap table at signing won't guarantee anything, but that combined with a good judgement of character is the best you can do. In the end you can get screwed either way, but if there is any caginess up front then run don't walk away.

They can issue new shares but they would have to notify you. You should have a clause in your agreement that any new grant you have the ability to get more options to stay at leat less dilluted or you can walk.

What does "walk" mean in this context? My (naive) reading is that you can cut all ties and run because they've essentially broken a contract; that's trivially true, but doesn't help with the actual goal of getting money from those options.