You've identified by omission precisely why it can be "wrong" for something to be priced "high". How on earth can I know if $20M is reasonable without knowing what the business is?
We're all sat here, reading about "average seed round valuations" and the like, but that concept tells you nothing about what the next startup you meet "should" be valued at. Claiming that it does means acknowledging that business fundamentals have been thrown out of the window, and what are you left with then? Gambling.
Of course early stage startups aren't judged by business fundamentals.
Your argument is fully general against valuing equity in any early stage business ever at any price. It equally says that the investors are "gambling" and the founders are "gambling", as much as anything about employees.
Yes, everyone who is being paid in equity is taking a risk. It is possible to attempt to assess that risk. The key to being an early employee is bringing an investor mindset to the table: do I think this company is going to be successful or not?
We're all sat here, reading about "average seed round valuations" and the like, but that concept tells you nothing about what the next startup you meet "should" be valued at. Claiming that it does means acknowledging that business fundamentals have been thrown out of the window, and what are you left with then? Gambling.