edit: what is with downvotes lately? This is not a contest, feel free to join the discussion.
You can't seem to understand that 1000 workers doing 'their' job may be hundrends of times less productive than doing the same job under the same company. Lots of things (machinery, know how, etc.) need a company and a capital.
Finally, I also don't understand discussing capitalism. Here we are discussing freedom for individuals to work and to create a start up. What would you rather do? Force everybody down the same principles? Not sure it's right.
Sure, being contractors might not be ideal for them at the moment, but they are the first 8 employees at the company. There are additional benefits to being in that situation.
In addition, we have no idea how much they do or do not understand their employment status. It is convenient for us to jump to the conclusion that the employees are ignorant about tax law, but that very well may not be the case. Just like in any other service industry, there are plenty of educated and informed workers in the mix, especially when you start looking at those that tend to excel in that particular field (he did say he now only hires top notch folk, after all).
I guess what I'm saying is, the discussion about W2 vs 1099 in this case is both valid and valuable, but let's not jump to any conclusions about who is exploiting whom.
Pardon my ignorance, but what "exploitation" is being discussed here?
However, they are going to this company by choice. They can choose to leave. They also agree to the wage. In addition to all of this, it's not easy being an independent worker. If anything, the small company is preventing them from getting exploited (they don't have to worry about chasing down a paycheck from each individual client, marketing, etc).
Finding clients is just as time consuming as the actual work itself. I know, I've done it myself as a freelancer.