The employees got paid in cash, (largely) not stock, because that's the deal they took.
Equity investors exist because most people would rather work for cash than for stock. Typically, the way the money flows is that college endowments & pension funds put cash into VC funds in exchange for equity; VC funds put cash into startups in exchange for equity; startups use that cash to pay salaries; and employees who receive those salaries spend a portion on college tuition, gifts to their alma mater, retirement savings, etc. that then gets recycled back into institutional finance. If the startup ends up being worth more than the money put in (either because they turn a profit or because they can convince some greater sucker to take that equity off their hands), the excess is returned to the VC fund in proportion to their ownership stake & liquidation preferences, who take 20% for their GPs and distribute the rest of it back to their LPs, who use it to fund scholarships or buy a new building or pay for your parents' retirement.
If you can convince employees to work for you for equity, you don't need VCs at all: you give them shares, and when the company has a liquidity event, everybody benefits. Most people don't take that bargain, though, because they don't have confidence that the equity will be worth anything and need to eat in the meantime. The premium VCs get is precisely because people are risk averse. If all companies were public and everyone were willing to work for equity, that premium would be arbitraged down to nearly nothing, but then we'd probably be complaining about how certain unscrupulous actors managed to convince people to accept equity of their worthless company and now those people can't eat because they were bilked out of just compensation for their labor. (The crypto economy basically functions like this, with various tokens acting as pseudo-equity in the "economy" that grows in value as the surrounding ecosystem grows and these tokens being freely tradeable on exchanges - and it suffers from precisely this failure mode, where it turns out that unforgeable tokens != unbreakable promises.)
> Most people don't take that bargain, though, because they don't have confidence that the equity will be worth anything and need to eat in the meantime.
No, I think the reason is different, and it's quite rational. Diversification. VCs invest in 10(0)s of startups, but an employee is only employed by one, and his/her job depends on the success of that one startup. It makes sense to take whatever money you can, and invest it in other start-ups (or equity markets).
It would be much more fair of course if "normal" people were able to invest in start-ups, or at least in VCs. (AFAIK currently only "sophisticated investors" can.)
