How does that work in practice?

If you're bootstrapped, borrow a bunch of money to pay tax because your company got to $10M val. But then the market shifts and it goes back down to $0 in later years, do you get the money back?

Even if you do, it sounds weird taxing someone for the right to create something, especially when they're still in the middle of creating it.

Yes, you do get the money back, that's the point of the paper.

This is better for many founders that otherwise wouldn't cash out at all. VCs will be forced to cover your unrealized capital gains taxes.

Would they pay interest?

Refundable taxes are often gamed? See Cum-Ex: Dividend Withholding Tax (WHT) Fraud and Missing Trader Intra-Community (MTIC) Fraud.