What you're looking for is an anti-dilution clause. There may be one in the stock option agreement that prevents this. If not, whether they can do it is going to depend on the stock option agreement and the laws of the state where they are incorporated.
I believe the best advice for you is to find a lawyer in the state where the company is incorporated and hire them.
It sounds to me like you've already gotten a raw deal on your ownership, and they think they can just walk all over you. Dilution at the time of funding should affect everyone the same, and if they want 12 percent for an option pool, then everyone should get diluted fairly (every share should lose %12 of its ownership). I believe anything else might be considered fraud, depending on the terms of the agreement.
You can exercise your vested shares whenever you like (under most agreements) and the only legalities I can think of are the tax implications.
On the other hand, it is standard advice in the venture-backed startup world to NEVER give an anti-dilution clause - I've heard the words "never give an anti-dilution clause to anyone unless they're God, and even then he'd better be giving you a term sheet worth its weight in gold." Unless you were aware of such a clause, it's unlikely that it's in there. At the end of the day, without a clause like that, the parties with the controlling stake in a company can issue shares to whomever they want - I'm assuming that they're issuing shares to themselves and not to you in order to implement this options-pool extension, and not literally taking away your (vested) common stock - now THAT would be illegal. My understanding is that there are some SEC regulations that prevent them from just distributing shares to a few people, but these are hard to enforce, and you'd need to basically sue your cofounders without a guarantee of success (e.g. what Savarin tried to do at Facebook).
Without an anti-dilution clause, early investors can be stomped all over by later investors.
NB: I'm not disagreeing with your arguments for why anti-dilution clauses are bad. But minority shareholders are otherwise relying on the trust from the board, which has every incentive to screw them over, so it's a no-win situation.
I've heard a lot of claims of things being standard advice (not picking on you, just this is commonly used expression) where the thing in question isn't standard, and is actually harmful or detrimental (or more specifically, highly biased in favor of the person handing out the "advice")
All of the "advice" I've seen from Venture Capitalists have been self serving rationalizations that almost never are really "standard" terms as much as they would like them to be.
For example, in one company I worked with, every employee had an anti-dilution clause. This didn't keep the VCs away.
> I believe the best advice for you is to find a lawyer in the state where the company is incorporated and hire them.
The value of this advice depends on the value of the options; but I agree. You need a lawyer to represent your interests separately from the company. It sounds like there are a few different stakeholders here: OP, the other employee shareholders, and the investors. If there are other employees who are being similarly diluted, maybe try to join up with them.
The biggest reason for this is that retaining a lawyer allows you to remove yourself from the situation and continue to be effective in your job. Let your lawyer have the nasty arguments and keep yourself out of it.
I believe the best advice for you is to find a lawyer in the state where the company is incorporated and hire them.
It sounds to me like you've already gotten a raw deal on your ownership, and they think they can just walk all over you. Dilution at the time of funding should affect everyone the same, and if they want 12 percent for an option pool, then everyone should get diluted fairly (every share should lose %12 of its ownership). I believe anything else might be considered fraud, depending on the terms of the agreement.
You can exercise your vested shares whenever you like (under most agreements) and the only legalities I can think of are the tax implications.