As the startup gets traction and more money from VCs, wouldn't it be wise to give raises in cash to early employees?
You're missing the point of my original post. If a founder owns x100 the equity, why should an early employee be bound to the same salary restrictions?
If anything, since I have 1/100th the equity, that means I should be able to get a multiple of some raise when series A comes through.
Remember, equity is a lottery ticket (especially for an employee). If you're a founder, even if your startup fails, you can get a job as a highly-paid EIR or your founder reputation will allow you to join some other startup in a high level role (VP, Director, etc). This does not apply for engineer/employee #1.
Of course you can try to negotiate for more. Enough people want to work at a startup however that if you ask too much, you'll get passed on, and they'll just hire the next candidate who doesn't act so entitled to a meaningful piece of the founders' pie. It's exactly the same phenomenon that lets the big game studios chew up and spit out engineers: there's always someone else willing to take the job for less, or even just put up with the status quo.
That's a massive part of the problem, and telling people to negotiate better doesn't address it — or even acknowledge it.
But you’re right that (if there is only a very small number of co-founders) employee #1 should never be accepting 1/100 the total equity the founders have. Employee #1 screwed up in negotiating at least half way decent deal for themselves.
However, it is up to potential employees to refuse offers that are not in their best interest.