It's the only really good way for the company, provided that it doesn't filter out good applicants who would have very good reason to decline leaving a full-time position for a chance at full-time somewhere else. I don't see how it's good for the employee though: the company is effectively shunting the risk of a bad hire from someone who is reasonably positioned to take the risk (despite what entrepreneur blogs may say) to someone who is very poorly positioned to take this risk, and pay them nothing for taking on that same risk.

Sure, it'd be nice if you could hire all your great employees this way, but forgetting for a moment whether it's fair, it's not realistic.