There are plenty of situations where there are down rounds or rounds where earlier investors are completely wiped out or diluted out of existence. In these case

There are plenty of situations where there are down rounds or rounds where earlier investors are completely wiped out or diluted out of existence. In these cases, the early employees get screwed big-time. Even in the optimistic case of an exit, whether it be an acquisition or IPO, the risk incurred by the employees is way too high because of the lengthening of time towards the exit event. The lucky ones can get non-recourse loans and cash out with something to show for their efforts, but the overwhelming majority can't, and end up having to shell out real money for what are essentially rolls of the dice or losing that equity altogether. It's interesting that if a person has vested stock with nominal value of $100 and exercise price of $5, he can't use that stock in lieu of the $5! i.e., he can't walk away with $95 worth of his grant. I wonder if there are IRS regulations that bar this type of arrangement.