Not everybody that is an early employee adds to the company value! Some people are not so bad they get fired but they are living off of other people's input. Before you start giving away more equity to early employees, you need to seriously think about how you are going to make the employee earn that e.g. if they leave before 3 years, they lose it, if they fail appraisals, they lose it etc. Many companies go bad because they do give away too much equity then there's not enough left for subsequent raises.
Selling equity to employees for their time is exactly like selling equity to investors for their money. Founders can only dilute their stake to a certain point before they’ll own too little to make fundraising worthwhile.
For a rough example, if the company gives 20% to early employees and 20% to investors, and want to raise $1MM A round at a $5MM valuation, they’d dilute down to 48% already. If they’d given 10% to early employees, they’d dilute down to 56%. That majority control could be significant. You can extrapolate lower numbers if a company needs significant cash and has to raise at a low valuation.
Hopefully the mechanics make sense and yes, there are companies that give too much away on paper and hurt the value of the equity long term because they didn’t have room to raise money or grant shares without giving up personal stakes.
