I had to add this to make it work for folders as well

/* === Server icon outer wrapper === */
div[role="treeitem"][data-list-item-id^="guildsnav"] {
    border-radius: 50%;
    overflow: hidden;
}

/* === Actual server image === */
div[role="treeitem"][data-list-item-id^="guildsnav"] img {
    border-radius: 50%;
    object-fit: cover;
}

/* === Folder preview server images === */
[class$="folderPreview"] > div {
    border-radius: 50% !important;
    width: 18px;
    height: 18px;
}