There is also a case to be made that even though initial investors took the risk to get a lower cap, they benefit from later investments even if they get a lowe

There is also a case to be made that even though initial investors took the risk to get a lower cap, they benefit from later investments even if they get a lower cap since the company becomes more valuable, making it more likely that they will actually profit more. While I agree that it's not ideal to have to allow later investors at lower caps, it could still be beneficial to earlier investors for the startup to accept these later investments. I don't think the moral burden should rest on the startup to go back to the earlier investors and offer a revised deal. Not only is it inefficient, but it also gives earlier investors the advantage when it comes to a hot startup that everyone wants to investment in initially. They can just bid with a high cap, guaranteeing that their offer is accepted, expecting the startup to come back because of it's "moral obligation" later on when other investors offer them lower caps.