Mercor co-founder Brendan Foody has criticized Sequoia Capital over a venture funding practice in which investors take part in the same startup round at different valuations. The dispute has drawn attention to how headline valuations can shape employee, angel investor, and market expectations around fast-growing AI startups.
Foody wrote on X that he had seen several rounds in which Sequoia invested in two tranches over the past six months. He said founders then presented only the higher valuation to employees and angel investors.
Dual-Priced Rounds Draw Scrutiny
In a dual-priced round, a lead investor may invest a larger amount at a lower valuation while also placing a smaller amount at a higher valuation. The higher figure is then used as the public headline valuation.
TechCrunch previously reported that this structure can create a perception that a company is worth more than the lead investor’s average entry price. The practice has appeared in several AI funding rounds where investor demand is high.
The Wall Street Journal reported that AI helpdesk startup Serval announced a $75 million Series B at a $1 billion valuation led by Sequoia. Days earlier, the company had reportedly been valued below $400 million as part of a Series A extension that also included Sequoia.
Aaru, an AI startup that simulates user behavior for market research, also used a multi-tier structure. Lead investor Redpoint reportedly backed the company at a $450 million valuation, while the announced headline price was $1 billion.
Sequoia Partner Responds
Sequoia partner Shaun Maguire responded to Foody on X and said it was unfair to call the practice a “Sequoia scam.” He said he had seen this happen about five times in seven years at the firm.
Maguire said the structure can happen when other investors are willing to pay a higher price for a hot company, often in AI. He said Sequoia may separate its company-building relationship with a founder from the amount of capital it is willing to invest at a higher valuation.
Foody later acknowledged that Sequoia is not the only firm using the practice. The concern remains focused on what founders tell employees and outside investors who may not know about the lower-priced tranche.
Employees And Angels Face Different Risks
Jason Woo, a partner in valuation and financial modeling at Armanino, said employee stock options should be priced using a blended valuation rather than only the headline number. Startups use independent 409A appraisals to set option strike prices.
Angel investors face a different situation because they are writing checks directly. Unlike employees, they do not have an independent appraiser between them and the valuation a founder chooses to share.
Verdict Capital founder Niko Bonatsos said at a TechCrunch event in Athens that startup metrics can also be stretched in other ways. He said some founders present annual recurring revenue by multiplying one strong day of sales by 365, which can make the term less meaningful.
Featured image credits: Magnific.com
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