To corroborate this, I joined one fintech startup when it had 7 people, with no equity, based on salary. The founder's rationale for paying higher salaries and not offering equity was that equity is worth substantially more to founders/investors than employees, due to factors like risk preferences and the fact that they could diversify, so it made more sense for him to just raise more money and pay purely in cash. This made sense to me and I actually wonder why it isn't more common.
I think there are some strong arguments in favour of equity grants:
1. Startups face high frictional costs when selling their equity; providing equity grants along with lower salaries may help to avoid cash-flow problems arising from the inefficiency in the market.
2. In a early-stage startup with inexperienced employees, providing equity grants can remove much of the valuation risk from employees' wages; if they do exceptionally good work, they'll automatically be compensated more by virtue of the increased value of their equity. (This also provides an argument for vesting cliffs: If an employee does exceptionally poor work, they can be fired before the cliff and their compensation is effectively reduced to match the quality of the work they performed.)
3. Psychological biases result in people working irrationally hard for companies which they feel that they "own", even if their ownership share is extremely small.
4. In some cases there may be income tax arbitrage advantages.
