There appears to be quite a bit of confusion as to what happened here. The TechCrunch article doesn't really provide enough detail, saying only that the staff was fired in order to "reduce the company’s liability" which doesn't really make sense.

I am not a lawyer, but as an investor I have seen this happen before. My guess (no connection to the company, wasn't aware of them prior to today) is that in lieu of filing for bankruptcy, they did an Assignment for the Benefit of Creditors.

But what may have happened is:
1. OnLive recognizes that they're essentially bankrupt. Directors and managers now have a fiduciary duty to maximize the recovery for creditors, not for shareholders.

2. Instead of going through a formal bankruptcy process, the company does an Assignment for the Benefit of Creditors (see a good explanation here [1]). Any price paid for the assets by a buyer above what is owed to the creditors goes to satisfy the liquidation preferences, though it's unlikely there will be much if any recovery of value above the debts owed to the creditors. The value of the common equity is totally wiped out (both common stock and employee options) as the total value of the assets is well below the amount due creditors + the liquidation preferences.

3. A buyer for the assets (the source of money with which to pay off the creditors who now own the assets of the defunct company) forms a new company, call it OnLive Asset Acquisition Corp.

4. OnLive Asset Acquisition Corp purchases the assets (not the stock) of the defunct corporation now owned by creditors. The new acquirer buys the assets so as to avoid any existing/potential liabilities of the defunct corporation from whom it purchases the assets. Imagine there's a company whose only asset is a rack of servers that you wish to purchase. To gain ownership of the servers, you could buy all the shares of the company or you could just buy the servers as an asset with no encumbrances. You would likely do the latter, as buying the stock comes with potential liabilities for past/future money owed or lawsuits. That's likely what happened here, but for IP, etc.

5. The original employer OnLive is no longer operating. The employees are all terminated, as their employer is gone and its operating assets are owned by a new company. The new company may or may not seek to hire some or all of the employees of the defunct company.

6. Even if employees had been able to exercise their options, they were virtually certain to be worthless. There is no way the price paid by the new owner for the assets of the dead company would exceed the debts + liquidation preferences (otherwise the directors wouldn't have liquidated it). Had the employees exercised their options, any cash they paid to do so would have gone to the creditors to satisfy the company's debts and they would have received zero in proceeds.

It's a sad story for the employees, but there are rarely any happy outcomes for a company in bankruptcy.

Again, I'm purely speculating on what happened. But based on the facts disclosed so far, it's not clear that one can conclude that the employees received a specific and unusual screwing by management vs. a typical screwing associated with the liquidation of a bankrupt employer.

[1] http://bankruptcy.cooley.com/2008/03/articles/the-financiall...