People don't know how to negotiate. Equity is the founder's only payoff, so they're going to be incredibly stingy about it, while playing up the intrinsic benefits.
Also, people don't know how to measure opportunity cost.
"Equity is the founder's only payoff, so they're going to be incredibly stingy about it, while playing up the intrinsic benefits"
There's also a lot of weight behind the "this is how it's done". 1% used to be very generous when founders had to roll the dice with 12+ months of their life to get seed funding and take big dilution when they did. Nowadays, it's cheaper/easier/faster to start a company, easier to get early stage funding, etc. It might make sense to reward employee #1 with a bit more equity... IF you can't pay them market rate (you buy equity by taking risk-- if you aren't underpaid, you aren't risking much beyond opportunity cost).
Not negotiating is part of it, but also its not knowing what to ask for. Though equity is the payoff, most founders at the beginning are pretty loose with their equity because it really has no value, so throwing someone a percent or two when its worth $0 to get someone happens quite often, especially when you as a founder have the lions share.
However, the biggest muff that people in this position do, is that they don't understand options and how they work, a little what this guy was saying. Take the options, why not, but treated as money and not sweat equity. You might not be able to get preferred shares and deep informations about the company, and you probably shouldn't, but you can ensure that whatever happens the money you put in vests without strings attached every 6 months until they pay you what you are worth.
Also, people don't know how to measure opportunity cost.