I agree the penalty is brutal, If they had dropped 5 ranking vs. 5 pages I think the punishment would suit the crime (provided that Google didn't look at their links and find that their were other egregious violations). I think part of that is that the abuse was exposed so publicly and not really fully denied/remove by RG, and part of it is that RG has a big reputation and everyone has heard of them. For Google, it's a great time to make an example of someone and help push the risk:reward ratio in their favor, so more startups think twice about trying black/gray hat tactics.

I'll be 100% honest, I've been approached more than a few times by people with approaches to SEO that are somewhat black/gray, and I've been really tempted to work with them because of the promise of additional traffic/business. It's always the fear of a JC Penny style backlash that kept me from engaging. If the punishment was more of a slap on the wrist, there would be a certain point at which it would be worth it for startups to try and game the system (how many startups are currently trying to game the system? I would argue a good %, just most don't end up with it out in the open like this.

From everything I've been told, however, they'll be able to get the penalty lifted as soon as they remove the bad links and get back to even footing. Shouldn't be more than 2-4 weeks.