I'm curious how they managed to dilute only the employees that left without harming everybody else. Can you please elaborate?

Easy. Nobody's options are worth anything, but retained employees get a retention grant from the acquiring company.

Private company shares are very risky.

Indeed! Never exercise options without a full understanding of preferred vs common stock, and what sort of preferences the founders and investors have. Naive founders may end up signing deals with ridiculous liquidation terms.

Also beware offers of significant amounts of stock in exchange for sticking around for an acquisition. The investors likely know the company won't reach its liquidation preference and thus whatever shares they give you are actually worthless.