What are the downstream implications of high dilution during seed round?

Question

In this guide to seed fundraising (https://www.ycombinator.com/library/4A-a-guide-to-seed-fundraising), YC advises not to give out more than 25% of equity to investors at the seed stage. Besides the obvious loss of founder stake, what are the other downstream implications of giving out a higher equity stake?Let's say I hypothetically give ~40% of my company to the seed stage (or pre-seed) investor for some reason. Would it be a problem for Series A or B investors coming in at ~20% stake down the line? If yes, what are the exact reasons?

rogerkirkness · Accepted Answer

Yes, it can be. In general, the lines between angel and pre-seed, seed and Series A are becoming fairly blurred at this point. You can raise a lot or a little. You can do it on SAFEs or a priced round. You can add a board member, or not. A lot of approaches sort of compete with each other for relevance in the open market, so you could raise a bad big round or a good small round, it's all 'it depends'.
Diluting yourself that much that early is a possible signal to later investors that your overall ambitions are smaller than they might hope. The reason being if you know you need to raise $X00M to get to scale, giving up so much so soon is an indication that path might not be as likely. And while as a founder it might not seem like a big deal (or be one) to the investor they are looking at seed stage companies more like 'There's a 5% chance this gets huge' than as a standalone asset. In that scenario, more dilution might make it 3-4%, which is much worse.
Amazon gave up 33% in their seed round to Sequoia, raising $1M on $3M pre-money. You can create a generational company and massive wealth with 40% dilution in your seed round no question. It is mostly just an incrementally worse indication for future investors, hardly a deal breaker, but something to be mindful of.