The Hourly Employee
If I’m averse to the idea of working for equity, which we all know is an often ambiguous, highly risky idea that may or may not turn into any tangible value, then the worst thing you can do as a company is pay me in stock, options or any form of ownership in the company. I’ll say “wow this is cool, I am a business owner!” But then in 2 weeks, I’m going to come back wondering where my steady paycheck is. Uh oh.

The Equity Partner
Just as importantly, if I’m really interested in owning a part of a business that I work in, and I love the idea of spending long nights turning this idea into a valuable company that’s worth millions of dollars, the worst thing you can do is pay me an hourly rate and tell me to build. In this situation, the best ideas will quickly start to be held back (“why should I advance this project so they see massive gains and I see no value?”), and I’ll resent you for making me work on something that could one day make you highly successful, while leaving me behind in the dust. Feeling unappreciated, I’ll likely leave.

Neither of the people above are “bad” for behaving this way. Rather, it shows a lack of experience (or a misread of the situation) on the part of the founder to adequately understand the risk propensity of that person and tailor their offering to that individual. Consciously or not, we all behave based on our own self interests, and both of the guys above are simply trying to ensure that they are being adequately compensated for their perceived risk and time investments.

What if we compensated someone the wrong way?

You just paid someone in equity, and a week later they are already asking for money to help them pay the bills. You have a couple choices here.

1. Tell them to suck it up, find money elsewhere and do their job. This is just awesome for morale and will ensure your business goes far— not. It might work once or twice, but it’s a recipe for problems.
2. Curse the situation, then pay them money in addition to equity. This is just as bad as #1, but in reverse. Instead of making them unhappy, you’re making yourself miserable. You just gave up equity in YOUR baby, your company that you’ve slaved for, and now they want capital that you need in order to help the business survive at a crucial time? This is a nonstarter and will leave you resenting them.
3. Offer to revert some of the already granted equity into a salary. To me, this is the only path in 95% of situations. For someone who wants to be paid a steady salary, it has to come from somewhere. Unless they are irreplaceable and you feel the value is there for them to have significant equity AND be taking a salary (I can’t think of a single situation I’ve encountered where this was the right path for a young startup), you should have a frank discussion about converting some of that equity back into working capital that can be used to pay the person. They might still end up with a couple points of equity that helps them retain a level of ownership, but they are also getting the capital they crave to satiate that little voice that’s worrying about getting cash in hand.

You will never make someone happy who wants ownership by providing them with just cash. You will also never make someone who’s risk averse happy with pure equity.