Most founders (at least in the software area) provide a lot of sweat equity, but almost never any cash.

Also, early startup employees are persuaded to accept below-market salaries and work a lot of overtime, exactly like the founders, without the upside ( rarely more than 1% of the company).

I was given an offer like this recently.

The downside was a lower pay now and substantially larger risk of losing my job compared to other places. And developer work here isn't exactly hard to find.

The potential upside was... maybe two years down the line they'd start paying me what other people were willing to pay me now. The guy I negotiated with even tried to make it sound like we were all there on the same terms cos our monthly pay was the same, leaving out that I'd be the only without a share, the other four sharing the company equally... have to say I walked away from that one.

This is very common. And some kid will take the offer. Blows my mind.

Take a job for below market pay, sure. You better have decent equity though or you are being taken advantage of.

I know a lot of founders who've put in significant cash in their businesses. And besides, sweat equity is also, well, equity.

I'm not saying there aren't early employees that deserve better deals, I'm quite sure there are. But a lot of the perception of unfairness I think stems from a lack of understanding of the differences between being a founder and being an early employee. They are just very different bargains, each with their ups and downs.

For example, let's say three founders own 20% each and there's an external investor that owns 20% and a 20% options pool. The founders payed for their shares with a year's sweat equity. The first employee gets 1% from the options pool. From then on everybody makes the same, and works just as hard. Is that unfair?

I'd say it depends, and the math is not entirely straightforward... Stuff you would have to take into account (and which I rarely see mentioned when people talk about this) include the probability of the company failing before raising money / hiring the first employee, each person's alternative costs and the company's expected future value when the first employee was hired. There are also more subtle issues, like the employee having every right and incentive to leave the minute the company starts going downhill, whereas the founders... Well, it's just very different.

I've been both by the way. :P

Come to think of it, I've been playing a bit with Bayesian probabilistic programming with PyMC lately, and it might be pretty interesting to put together a model for this. I think it could give a pretty interesting picture of how expected future outcomes vary for the different people, depending on the different parameters. Anybody want to join in the fun? :)