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Yes, it costs more.

So then the two optional responses are:

1. If the startup doesn't have the money to pay more, what should it do?

2. If a startup decides not to opt for any of the options, and the competitors do, what should it do?

-- Note: the competitor can be in India, for example.

Increase the equity for early employees by roughly an order of magnitude and aggressively protect their, still relatively small piece of pie, from dilution.

Agreed. If you dilute a single employee's equity by any amount, you do not deserve to have that employee. Period.

Dilution is inherent aspect of equity financing. However, due to the extremely small amount of equity that employees receive in exchange for such a large amount of their overall resources, the effect on their personal outcome is disproportionately affected by the dilution that occurs with series.

To the point where the risk and reward involved make it a losing proposition. As a rule of thumb, I anticipate the value of employee options to diminish by an order of magnitude between the angel round and IPO/sale. This would make an initial stake of 0.5% in a company that sells for 100 million dollars to be worth $50,000, before taxes.

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