The perception that VCs should consider themselves lucky to have invested in an immature asshole's startup sums up much that is wrong with Silicon Valley. I don't wish for another burst bubble, but if it happened it might be a useful reset.
If there is a bubble in this industry, it is a bubble of amateurs; people who shouldn't be investing or working in a field that is driven by extremes, and always has been. Extreme people chasing extreme success at extreme odds. And you know, everything in those extremes is going to look weird to people on the outside. Young Gates also wrecked sports cars and nearly went to jail; maybe these are all anecdotal, but the fact remains that you've got to accept a bit of eccentricity in this industry, if you want eccentric returns.
If this whole Secret backlash thing continues, the kids in this industry might need a history lesson on why Peter Thiel called his VC firm the Founders Fund, and why it was so novel at the time. Investors always want to give founders a tough time; until Thiel and Co. came along, Valley VCs practically colluded to ensure that young entrepreneurs remained poor until an exit. I'm sure they would love for that era to return, but thankfully there's just too much capital for such a thing to happen anytime soon.
The founders parlayed multiple VCs chasing them into gaining $3m for themselves. I don't see anything wrong with that personally, it's the investors money and it was voluntary.
I agree with Bill Maris though that it was far too early in the startup to be doing that. The VC must have assumed their pull in the VC scene would take them to some sort of success later on - so why not. But that is a risky gamble.
It should be pointed out that the investors were no amateurs. Redpoint and Index are Tier 1 VCs, who know exactly what they're doing. They were investing in the next Facebook, and it turned out this was not it. That's the game VCs play.
The VCs are cold hearted capitalists until the hot second founders have negotiating power and make the VCs compete. Then they whine.
They need to grow up and, as @sama says, if you don't like the deal? Stop whining and don't buy.
Whining about how your values aren't aligned? Don't invest. Don't like founders taking cash out? Don't invest.
I personally know many successful traders and managers who live very quiet, middle class lives despite having the means to do much more (usually because they get their kicks off business success, not consumption). Cf stereotype of the Swiss billionaire in jeans driving a beaten up Volvo. The head of a derivatives desk in the London HQ of a global bank used to drive a 10 year old hatchback to the office and lived in Zone 2 or 3 in the same house he bought as an immigrant with his first years' savings. Obviously, these guys don't appear in press releases. I would argue they are also relatively rare.
However, on the work hard play hard side, you can name literally hundreds of Gordon Gekko types like S. Cohen who bought Hirst's famous $8m stuffed shark or S. Schwarzman who likes to put his name on entire museum wings around the world. Some very driven people have more intense fun on the side and the only thing that matters to the VC/FOF is a. the possible ROIs under different scenarios and b. the probability of each happening; to calculate the NPV and therefore desirability of the investment. Some of the more extreme characters from this world are documented in "Richistan" [1] and "The $12m stuffed shark" [2]. The common trait amongst the "nouveau riche" is that they are intensely focused and good at their work, not letting their fun permeate.
If I had spare capital right now, I would happily take the other side of your trade; I'm pretty sure that spending behaviour (hard fun, tendency to consumerism, whatever you want to formalize it as), all else being equal, is not predictive of success, just as with race, gender and maybe even education or age (adjusted for experience).
As for the original subject, I think a lot of people who grew up well off or have had a few years to build some security do not realize how valuable those early marginal dollars are to someone without connections and a rich daddy. A "normal" person might well take 5 years to save the $100-200k necessary for a safe bootstrap; if they fail, they're back to the grind for another 5, delaying kids and life accordingly. It is perfectly rational for the founders to attempt to circumvent that if the market generously offers the opportunity, by taking out enough cash for a few trials should this one not work out.
[1] http://www.amazon.com/Richistan-Journey-Through-American-Wea...
[2] http://www.amazon.com/The-Million-Stuffed-Shark-Contemporary...
I don't know if you've ever watched the "Trader" documentary that profiled the life of thirtysomething Paul Tudor Jones, but it provides an 80s-era glimpse into world you talk about. Legend has it that PTJ bought every VHS copy and had it destroyed.
But yes. The 2 of the 2 and 20 is there because no fund manager can get the best talent without paying competitive market rates including a large part in cash to traders. Not just traders - I met a HR head in New York who told me he was taking home $440k... It's not standard of course, but I did feel (several years ago mind you) that funds raising with only the 20 part and foregoing the 2 were perceived as scammers or sub-par somehow.
The best books on the history of funds/great traders are Steve Drobny's [1] for this generation and Schwager's Market Wizards series if you want something a little further back [2]. There's a decent mix of stories - from "intrapreneurs" later backed by their own former bosses, to bootstrapping with their own capital, not everybody started with a big raise. It's also a good history of the industry and its gradual increase in sophistication.
[1] http://www.amazon.com/Steven-Drobny/e/B001JSFKO8/ref=sr_ntt_...
[2] http://www.amazon.com/Jack-D.-Schwager/e/B000AR7ZM4/ref=sr_n...