I see this as a problem for startups to get traction in the future if there continue to be these early product shut-down exits. What wants to go use a marginally better product when the is always the chance it will disappear into one of the bigger options at any time.

Not being in a position to judge this specific instance, I'd think in general you are better off showing some power, saying no to a deal, maybe entering into a partnership instead that keeps the focus on your product.