[nostrademons]

"No". That's basically the most effective tactic you can use in a negotiation - walk. You don't need an explanation other than "We're not willing to do a deal at that valuation."

If you want to elaborate in the hopes that you can work out a compromise solution, the description you wrote here is fine, except that you shouldn't reference the 25% guideline as being set by Paul Graham. Instead, go back and read the essay where he laid it out and understand the reasoning behind it, which is probably something like "If we take your money at this valuation, then after the remainder of the seed round and further dilution from further rounds, there is not enough equity left for founders to make it worth our while."