There's a really nice info graph on techcrunch explaining dilution of stock.
http://techcrunch.com/2011/10/13/understanding-how-dilution-affects-you-at-a-startup/ After reading it I wonder if someone could better explained the statement at the end of the graph. Why would you want to avoid "participating preferred stock"? Is this because there is only a fixed dividend and you are not able to get more than that when selling the company?
It because this is the usual "realisation of the value" point, until then its just been more people taking a bet that the stock market will look favorably on the company ...
This is the day everyone waits for, whatever the stock does at this point is where you actually have "true value that you can exercise", before this point you can't get out with your money.
As you point out you can still hold onto the stock hoping that it climbs even further ... but most of us are hoping that we have a few million sitting there because we can then loan against this amount, we can use it for other things while still having it invested.
The other common exit is a tradesale which is often some cash, some stock in the buying company ... you then get diluted even further and depending on the deal, this is likely the end of the road for you as any sort of real player.