Perhaps infant startups do not deserve "great talent". Engineers shouldn't have to give up cash for lottery tickets, especially when many founders won't even include the number of outstanding shares, preferences, etc. in the options agreement!
However I agree founders should be up front about the financial/investor makeup of the company.
I assume that the options are intended for people that are bad at math.
It does appear to be a way to get employees for cheaper than market rates by taking advantage of an arbitrage in employee lack of understand of the financial and legal issues concerning stocks.