It does make me wonder of the actual time commitment expected from the candidate, however. Are you expecting the candidate to spend upwards of 8 hours on a coding project? In some ways, one could argue that you might be asking them to do "free" labor. Who owns the work that the candidate provided?
I understand the need to find the best candidate, but I also think being respectful of a candidate's time means not having them to go through extensive interviews (technical or not) that total more than a few hours. Sure, some folks don't work out - but that's a risk I think organizations have to be willing to take.
Or maybe they realized that the "interview" was a way for this startup to get free work without actually hiring anyone. Time was already wasted.
A bounty system however is a much better process than this.