I see this argument a lot: companies shouldn’t offer more equity in a down market because employees wouldn’t be willing to give back equity if they were up significantly.

It doesn’t matter if this situation is “fair” though. What matters to the company is people will quit if they’re making half of what they expected to make.

This is exactly right. In some situations it's a matter of practicality not morality. Anyone compensated in equity in large part needs to be willing to accept some share price volatility, but at a certain point people are going to leave and the company has to be proactive about that.