The downside to failure is exceptionally low. It's all other people's money...
Oh my!
Oh my!
A great read if you're interested in learning more about the history and operating procedures of the sales & trading side of investment banking is Traders, Guns and Money by Satyajit Das. Its sections on credit default swaps and collateralized debt obligations are particularly interesting when you consider that they were written in 2006, pre-crisis (around the same time that Leveraged Sell Out was getting started, in fact).
1% odds in an even game suck; 1% odds where you're given your wager by someone else and you get to keep 50% of the upside and the upside is potentially 10000:1 is pretty awesome.
The fact is is someone else's money directly modifies the costs to you, and therefore changes the risk/reward calculation. There is no implication that you wouldn't work as hard simply because it isn't your money.
Answer quickly - how much of your net worth would you risk on a bet with 1% chance of a 1000X payout? Now how much would you risk if you can hand off 90% of any loss you take to someone else?
The difference is what we call moral hazard: http://en.wikipedia.org/wiki/Moral_hazard
Re-read the comment.
An early employee is paid a salary, and they also get options. The OP's point is that receiving the salary and options means your risk profile is different.
There's no moral hazard here, unless you believe receiving a salary is a moral hazard.
The entire reason VCs give you the money is to take more risk. That's, literally, the point.
So you do understand things correctly, yet came to the wrong conclusion that VC were somehow being wronged by this.
The whole point is rich people, investment portfolios, etc. have an entirely different risk profile than individuals. For an individual, low-probability high EV (high variance) is dangerous, which is why you buy insurance -- essentially negative EV (a 100% chance of losing either $1 or $2, but not losing your $1000).