I'm wondering if raising any other smaller seed rounds or convertible debt effectively precludes your startup from applying to YC? The application page says that they "can probably help any startup that hasn't already raised a series A round from VCs" - does that mean everyone that got accepted built out their first versions on the side without any funds?

I recently started a promising side project with two others and I think it'd make a compelling application to the next YC round. However, the team member that had the initial idea has already taken on a bit of funding ($25k) while he was building the prototype by himself before the other two of us joined, plus he was planning on taking on about $100k in convertible debt so we could all spend more time working on it (the three of us currently rotate hours while we pay rent with consulting) and he thought that would preclude joining YC because it would mess with later valuations. For example, if the YC valuation is really low, then the investors that provided the convertible debt would get way more than the 10% or so that we were all probably expecting, more like 40-50%. I don't care about valuations but giving away half the company for such a small amount of funding sounds insane.

So has anyone else raised seed money before getting into YC, especially convertible debt? Or does that pretty much rule you out and is YC geared only towards funding those where YC is the first and only round of seed funding?