From my own experience this is _exactly_ what happens. Only they intelligently manipulated my shareholder agreement in a way that I had to actually buy the options, no paper transfer, I needed cold, hard cash. Having very little money at the time (being between jobs) I was unable to do so, which meant that I forfeited my options. Probably for the best anyway, because buying them didn't guarantee a buyout, only the option of one. I would have been out $5000, just waiting for the day to be bought out, which would probably never come.
Lesson learned: read things very carefully, confusing language is intended to be confusing. I basically gave away two years of my career to kool-aid equity. Just be really careful, and if you don't fully understand something ask someone who does understand. If you can't get a direct answer, leave. Don't waist your time; you're being gamed.
Wait.. in the most typical case you are granted the option, not an option on a option. Thus if you actually exercise the option your not receiving the option of cashing out, your receiving very real shares in the company.
Was that not the case in your situation? I've seen some incredibly poor option deals (NQO options that exercised to non-registered shares spring to mind), but never the scenario you described.
Lesson learned: read things very carefully, confusing language is intended to be confusing. I basically gave away two years of my career to kool-aid equity. Just be really careful, and if you don't fully understand something ask someone who does understand. If you can't get a direct answer, leave. Don't waist your time; you're being gamed.