When a company is acquired how are employees compensated?

Let's say you join a small (< 50) hot startup. A month or two after you start, they end up getting acquired for $1 billion. As an employee that just started would you receive any of that money? I'm assuming this is based on equity, but am unsure. How do you determine how much you will receive from equity or cash when the company is acquired? Do you receive cash payment right away or how long after the company is acquired do you receive it? What are things to look for/negotiate in a hiring contract to make the most as a new hire when a company is acquired?

It 100% depends on your stock options agreement and how the founders/board negotiate the deal during the acquisition. Things to look for: cliff/vesting period, acceleration (very important if you think the company will be acquired soon), strike price.

Also, you already probably know that, but it does not really matter how many SHARES they offer you, what matter is what PERCENTAGE you're getting with this many shares.

As for many things, when things are unclear assume the worst and you'll be right. If you're working for a big corporation in retail, the only thing that a buy out could give you is maybe the risk of being fired (this is called "restructuring").

Same apply for startups, whatever the size. The only thing different in startups is that theorical promises can come quickly. It's a good thing to motivate troops to mention "we're thinking about stock options". In business while nothing is signed, nothing is said.

Don't listen to the fairy tales about free shares or stock options while you don't see them on a contract. If your company does well (and eventually get bought) nobody will give you a cent because the skilled and cheap (and sheep) worker you are, has become useless or at least substitutable.

If your startup uses typical Silicon Valley vesting guidelines, no, an employee would not receive anything from the acquisition because employee stock options do not vest in any proportion for at least one year. Unless there are special terms for acquisition in your employee stock option agreement, expect to receive nothing.