Brendan Foody, co-founder of the AI talent platform Mercor, has publicly accused Sequoia Capital of using a valuation strategy that he says misleads employees and angel investors. Mercor was last valued at $10 billion.
Foody posted on X that in the past six months he has seen about half a dozen funding rounds where Sequoia invests in two tranches. He wrote that everyone pretends only the higher valuation exists. Founders then misrepresent that number to their employees and shop it around to angel investors as well.
The practice is not new. TechCrunch has previously reported on venture capital firms investing in the same round at different prices. The lead firm puts a large chunk of its capital in at a lower, preferential valuation. It then puts a much smaller amount in at a significantly higher price. The announced headline valuation creates the perception of a dominant market winner, while hiding that the lead investor's actual average entry price was much lower.
A stark example of the gap
A concrete case came from the AI-driven IT help desk startup Serval. It announced a $75 million Series B at a $1 billion valuation led by Sequoia. But according to The Wall Street Journal, the announcement did not tell the whole story. Days earlier, the company had been valued at less than $400 million as part of a Series A extension in which Sequoia also participated. That is less than half the headline figure. Foody's criticism points directly to that gap between perception and reality.
Serval is not the only example. At Aaru, a startup that uses AI to simulate user behavior for market research, lead investor Redpoint backed the company at a $450 million valuation despite an announced $1 billion headline price.
Sequoia partner responds
Shaun Maguire, a partner at Sequoia, pushed back on Foody's characterization in a response on X. He said he has seen some of this behavior but thinks it is unfair to call it the "Sequoia scam." He stated that it has happened approximately five times during his seven years at the firm. According to Maguire, other investors are willing to pay a high price for a hot company, usually an AI startup, at multiples above what Sequoia is willing to pay. So Sequoia tries to separate the company building relationship with its partner from the capital, leading to two tranches at different valuations in close succession.
Maguire said he is not aware of anything shady but would like to know if anyone has seen misconduct. He noted that venture capital is a repeated game, so it does not make sense for Sequoia to mislead people. He also congratulated Foody on Mercor's success, calling it a miss for Sequoia.
Maguire's response frames the practice as a market reality rather than a deliberate trick. Sequoia, he suggests, simply will not pay what competitors pay for the hottest deals, so it structures its participation differently. Whether that explanation holds up depends on a question Maguire did not address: what founders tell the people who do not already know about the lower tranche.
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Broader context and implications
Foody acknowledged that Sequoia is not the only firm using this tactic. While the dual pricing structure inflates a startup's perceived worth and helps attract top talent, calling it a scam may be too strong.
Employee stock options should theoretically be priced based on the blended value of all tranches, not the headline number. That is according to Jason Woo, a partner in valuation and financial modeling at Armanino. His firm provides the independent 409A appraisals that startups use to set option prices. A 409A is supposed to reflect a company's fair market value, giving employees a strike price that is insulated from whatever valuation gets announced in a press release.
There is a catch, however. 409A valuations are widely understood to skew low. A lower strike price means a smaller tax bill for the company, so there is a structural incentive to keep that number down. The appraisal that is supposed to protect employees from an inflated headline valuation is also, by design, not trying particularly hard to reach the top of the range.
The angel investor question is more complicated. Unlike employees, angels write checks, not receive options. There is no independent appraiser standing between an angel investor and whatever number a founder chooses to share.
Other ways perception is gamed
The dual pricing structure is just one method venture capitalists and founders use to manipulate the perception of success in a hyper competitive market. Another more pervasive tactic involves manipulating or outright overstating annual recurring revenue (ARR).
Venture capitalist Niko Bonatsos, a longtime veteran of General Catalyst who recently founded Verdict Capital, discussed this issue at a TechCrunch event in Athens last month. He said that Verdict mostly invests before metrics, before product, and before the company has fully taken shape. But he has past portfolio companies, and sometimes conversations are telling. He receives a call or email with a very high ARR number and thinks that he did not remember that company doing so well. When he reaches out to the founder, the answer is often that the figure is 365 times the revenue made yesterday because one campaign hit. Bonatsos said that some of these terms have lost meaning.
Foody declined to comment further. Sequoia did not immediately respond to a request for comment.
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