>> That being said, my takeaway was that they had thrown around equity so liberally that they’ve exhausted their employee options pool and it’s going to interfere with their ability to recruit going forward. 

They can issue more stock to incentivize new employees, which is fair in that it dilutes everyone equally (preferred and common together).

What is unfair is to assume that the preferred stock allocation must be a constant, and that you have to claw back existing stock options in order to pass on stock in the existing options pool to new employees.