Ethical? Acceptable? Those are two different things.
First of all, a verbal contract is indeed a contract when everything stays the same. It's the last part that's the catch. When the written contract is delivered it often has nuances, detail and even sometimes major items that are substantively different from expectations. If the contract is essentially what was understood when you agreed to accept employment then an argument can be made that it's unethical to back out. Take caution considering this if later you may be interested in obtaining employment at the same organization. They may not want to do business with you for specifically this reason.
However, it still may be acceptable based on organization culture and whether a verbal acceptance is considered tentative and non-binding. In my experience, it is not the case that organizations like this. Even if you cite unpalatable contract provisions, which is a reasonable reason to decline a contract, most organizations would want to talk about it to either negotiate or convince you to change your mind. Were you to hold a hard line ("I don't do arbitration clauses") or simply refuse to reconsider they would not look upon that nicely. Onboarding new employees, even in early stages, is costly and time consuming for the organization -- simply interviewing you cost them hundreds or thousands of dollars.
From a practical perspective their perceptions don't control your actions. Even if they could enforce it like a contract (maybe they could), no company in their right mind would take that approach. Also, employment contracts, whether written or verbal, are often considered non-binding. Just as they are able to decline to hire anyone because they don't like something in a background check, you also certainly have a right to decline their invitation. It's your decision, and they don't have a real choice in the matter.
Direct and honest conversation here is the best option. If it's indeed the case, simply tell them that it became clear as the contract was presented in writing that it would not be possible to survive with such a drastic reduction in compensation at this time. If they are a positive and upbeat place to work, they'll try to do something to sweeten the deal. Otherwise, you probably wouldn't want to work there in the first place.