1. The gift need not be equity; cold, hard cash to solve this problem.
I had a side project that I decided to turn into a business when a co-founder became available. We wanted to do a 50-50 split and achieved this by "selling" the IP I had created to a new entity which had the 50-50 split. The cash can stay on the books as an Owner's Contribution (for LLC) or as a liability.
2. My first startup was 65/20/15. My current one is 50/50. The psychological implications of both are very interesting. When I had 65% control, I could ultimately make all the decisions, but the others definitely felt some resentment or maybe a better way to explain it was they thought well he's gonna ultimately do whatever he wants so there's no need to fight too hard about everything. It never felt like it too much convincing to discuss big decisions (nor did I necessarily get tons of input). These were very good friends and we managed it, but anytime there's an obvious veto power, it changes the character of any deliberations.
What 50-50 does besides the "feeling" of fairness is that it forces you to convince the other person that it a certain way. Knowing you cannot just trump someone, you must persuade someone else of the way to go. Both of us understand that there has to be a decision made, and we can never know 100% the right way to go, and sometimes we let one person "win" and vice-versa. It does add a lot of confidence that when we finally do move forward with a direction, everyone is 100% on-board. I would add it helps a lot if you and your co-founder have complementary roles (CTO/CEO) as that can create clear delineation on who gets to "trump" in certain cases. Always better to let the person who has to execute the decision make it!
No, it isn't. At a company that has raised capital or generates revenue, 5% might be enormous, or it might not be. It all depends on the company's valuation.
The fundamental problem many early-stage startups run in to is that they haven't raised capital, don't have revenue and they try to use equity as an alternative to monetary compensation.
In these situations, "sweat equity" is almost always a poor alternative because the math rarely makes sense for the recipient. For instance, if you're an experienced developer who can make $125,000/year and a friend wants you to become a co-founder of his business, forgoing salary until some future date or event, how much equity in a business worth $0 today do you need to make up for your salary? It's a trick question, and the answer is not 5%.
Equity can be a very complex matter, but it's also very simple when someone suggests that it be used as a substitute for cash. If somebody wants to pay you for your services using equity, forget percentages. Determine what it's reasonably worth in dollars, if anything, today. If you are willing to accept less than the dollar value of your services, you're being generous to the company, not the other way around.
I don't actually disagree with you about employees asked to work on equity-only and deferred salary. It's just that I call those people "cofounders".
One of the problems employees face in Silicon Valley is that the valuations on angel and venture-backed startups are exorbitant, so the equity is overpriced. Seed stage startups with no traction (and sometimes no launched product) can still sport million-plus valuations. As an employee, it takes a leap of faith to believe in these valuations and use them as the basis for valuing your equity. Fortunately for these startups, enough individuals are willing to take that leap of faith.