We have protections against arbitrary dilution, by e.g. issuing extra stock or doing a new round that values the company at $1. We've never needed them. What I meant by the "no soup" remark was that we don't care that much about legal protections; it is a more powerful deterrent that we would blacklist any VC who screwed us over-- or who screwed over any of the startups.
That in itself speaks strongly for YC. I'm tempted to make a joke about startup unionization.
In general, is maintaining a good reputation an adequate incentive for VC firms to avoid abusing founders or angel investors?
Empirically, very much so. Stories of investors maltreating founders are not uncommon in the startup world generally, but they are extremely rare among the YC alumni.
Creating this "repeat player" effect is awesome. Sometimes the best-drafted legal provisions can have loopholes. This kind of leverage makes everything much simpler.