Neil - this is a good question, as I get it all the time (and people do think I'm crazy for accepting equity in lieu of cash). It is indeed extremely risky, and difficult to value shares with early stage.
#1 is the Context - I INVEST in companies [by providing some key value they need]. The investor perspective is very important. I like to work with ver-early-statge, mostly as a cofounder. The ball is in my court to be able to pick winners. This model is now very common btw, used by most of the early stage accelerators out there [std. deal = 6% of co. equity at Series A, hopefully on graduation day]. This bunch has replaced the pre-revenue VC, and you can research their numbers.
Your question about services provided or taking charge of a section of the
business has to do with the Operational scope of the venture's needs, the provider's goals, etc.
[When is the equity actually worth real cash?] Early Founders, investors, & equity holders' bet pays off at some liquidity event, usually 3-5 years in, such as an acquisition or re-capitalization by a much larger investor. There are circumstances to get liquid earlier (Rob points out a good one)
]Why is equity in a new, unproven business worth accepting?]
Because you see something of real value, ahead of the curve, and know who will acquire it and why. Or, perhaps the team is top-notch, needs what you bring to the table, and would be a lot of fun to work on. There are other reasons - for INVESTING.
[How to structure
an equity deal so its going to actually become real cash as payment] You get your cash when the investors and founders - alongside you - get their cash. (The topic of Preferences is sidely discussed in early stage investment docs.)
Hope this helps. Be glad to have an offline convo about it.