One thing you touch on here that's rather important is disclosure of information honestly to potential employees.
Whereas investors (hopefully) have done their diligence on the company and are privy to the full financial situation of the company, employees quite often aren't. Employees generally don't get a copy of the term sheet, or know much about their options beyond the "40,000 shares valued at .03 each with an outstanding number of shares being 10mm".
When you ask investors to take risk, that's one thing. They have the most to gain (due to more favorable terms) and aren't actually having to put in the sweat equity to make it happen, and they also get the best information. Employees however often have no idea what the burn rate of the company even is or what the current equity structure of the company looks like.
When a potential client or employer offers you equity, you can't sit there and ask them for their financials. And for the most part, employees and contractors aren't very well educated in the risks involved with investing in a startup either.
> When a potential client or employer offers you equity, you can't sit there and ask them for their financials.
Why not? If they flip out and don't hire you, hurrah! People who are allergic to financial details don't make good business partners. (Bernie Madoff being the asymptotic example. He was famously hostile to questions about the financials.)
Whereas investors (hopefully) have done their diligence on the company and are privy to the full financial situation of the company, employees quite often aren't. Employees generally don't get a copy of the term sheet, or know much about their options beyond the "40,000 shares valued at .03 each with an outstanding number of shares being 10mm".
When you ask investors to take risk, that's one thing. They have the most to gain (due to more favorable terms) and aren't actually having to put in the sweat equity to make it happen, and they also get the best information. Employees however often have no idea what the burn rate of the company even is or what the current equity structure of the company looks like.