It's pretty common to subsidize employee equity because employees having equity are incented to work, and because common generally is discounted to preferred by a larger factor very early in the formation of the company. It's reasonable to simultaneously treat employee equity as $2mm valuation and investor equity at $5mm valuation, especially with a note.
In this case, though, I think the way to win the negotiation is to walk. A competent engineer is more like $150-200k total comp in the bay area, and doing that as $100k + 100k of equity/yr in a real company is pretty plausible.
A more plausible story is offering $50-100k and then equity levels which ramp up rapidly as you go down to $50k. Someone taking $50k vs. $60k should get more than $10k x 4 of extra equity. Maybe something like 100/0.10 90/0.15 80/0.25 70/0.40 60/0.6 50/1. Then, if you need to prioritize candidates, absent other factors, the 50/1 people have a plus mark.
In this case, though, I think the way to win the negotiation is to walk. A competent engineer is more like $150-200k total comp in the bay area, and doing that as $100k + 100k of equity/yr in a real company is pretty plausible.
A more plausible story is offering $50-100k and then equity levels which ramp up rapidly as you go down to $50k. Someone taking $50k vs. $60k should get more than $10k x 4 of extra equity. Maybe something like 100/0.10 90/0.15 80/0.25 70/0.40 60/0.6 50/1. Then, if you need to prioritize candidates, absent other factors, the 50/1 people have a plus mark.