Recently, on the social platform X, a number of founders and those who have transitioned from founding companies to investing roles publicly shared negative experiences concerning their interactions with venture capitalists. These grievances spanned a spectrum, from VCs reportedly dozing off during crucial pitch presentations to instances where investors allegedly advised a founder to dismiss a co-founder.
Brendan Foody, co-founder of Mercor, an AI talent platform recently valued at an impressive $10 billion, specifically criticized Sequoia, widely recognized as one of the world's most prestigious VC firms.
Foody articulated his concerns on X, stating, “The “sequoia scam” is worse than a single horror story.” He elaborated, “in the last 6 [months] ive seen a half dozen rounds where sequoia invests in 2 tranches. everyone pretends they only did the higher valuation. founders misrepresent this to their employees & then shop it to angels too.”
This practice of venture capitalists investing in the same funding round at varying valuations has been previously documented by TechCrunch. The mechanism typically involves the lead VC firm deploying a substantial portion of its investment at a lower, more favorable valuation, while a considerably smaller sum is invested at a significantly elevated price. The resulting "headline" valuation, often widely publicized, cultivates an image of a dominant market leader, effectively obscuring the fact that the lead investor's true average entry price was considerably lower.
Such disparities can be quite pronounced. For instance, when Serval, an AI-driven IT helpdesk startup, announced a $75 million Series B round at a $1 billion valuation, that public statement did not encompass the complete financial picture. As reported by The Wall Street Journal, Sequoia’s actual lowest entry point valued the company at merely $400 million — less than half of the publicized figure. This significant divergence between the announced valuation and the investor's effective entry price highlights the very gap between perception and reality that Foody emphasized.
Serval is not an isolated case. Similarly, at Aaru, a startup leveraging AI for market research through user behavior simulation, the lead investor Redpoint reportedly supported the company at a $450 million valuation, despite a publicly declared headline price of $1 billion.
Shaun Maguire of Sequoia directly challenged Foody’s characterization. Responding on X, Maguire stated, “TBH I have seen some of this behavior but I think it’s unfair to call it the ‘Sequoia scam.’” He clarified the firm’s perspective, noting, “This has happened approximately five times during my seven years at Sequoia. What happens is other investors are willing to pay a high price for a hot company — usually AI — at multiples above what we’re willing to pay. So we try to decouple the company-building relationship with our partner from the capital, and this leads to two tranches at different valuations in close succession.”
Maguire further asserted, “I’m not aware of anything shady here,” adding, “but if you’ve seen it I’d love to know. VC is a repeated game, so it just doesn’t make sense for us to try to mislead people. And if anyone has, I’d love to know. And in general, congrats on the success of Mercor — it was a miss for us.”
Maguire’s defense positions this practice as a consequence of market dynamics rather than an intentional deceptive strategy. He implies that Sequoia is simply reluctant to match the higher valuations offered by competitors for highly sought-after deals, thus necessitating a different structuring of their investment. The full validity of this explanation, however, hinges on a crucial point Maguire did not address: the information founders convey to stakeholders unaware of the lower valuation tranche.
While Sequoia seems to employ this multi-tranche pricing mechanism with notable frequency, Foody conceded that other firms also utilize similar tactics. And while these dual-pricing structures undeniably boost a startup's perceived valuation and can aid in attracting premier talent, labeling the practice outright as a “scam” might be an overstatement.
This nuance is partly due to the way employee stock options are theoretically valued. Jason Woo, a partner in valuation and financial modeling at Armanino, explained that these options should be priced based on a blended average across all investment tranches. Woo’s team is responsible for providing the independent 409A valuations that startups use to determine the price of employee stock options. A 409A is an impartial appraisal designed to establish the fair market value of a private company’s shares, dictating the actual cost employees pay for their options, irrespective of any valuation announced in a press release.
However, there is a significant caveat: 409A valuations are generally known to lean conservative. Given that the 409A establishes the strike price for employee options — and a lower strike price translates to reduced tax liabilities for the company — there is an inherent structural incentive to keep this figure at the lower end. Consequently, the independent appraisal intended to safeguard employees from an inflated headline valuation is, by its very nature, not rigorously aimed at reaching the upper bounds of the valuation spectrum. While employees might not be paying the headline price for their options, it also suggests they may not be receiving a completely transparent view of the company's true market value.
The situation for angel investors presents a greater complexity. Unlike employees, angel investors contribute capital directly rather than receiving stock options. Crucially, there is no independent appraiser to mediate between an angel investor and the valuation figure a founder opts to disclose.
Beyond the dual-pricing structure, this practice represents just one method by which VCs and founders strategically manage the perception of success within a intensely competitive market. Another, arguably more widespread, tactic involves the manipulation or outright exaggeration of annual recurring revenue (ARR).
Niko Bonatsos, a seasoned venture capitalist formerly with General Catalyst and now founder of Verdict Capital, spoke on this specific issue at a recent TechCrunch event in Athens. He recounted, “We [at Verdict] mostly invest before metrics, before product, before the company [has fully taken shape] but I do have a past portfolio, and sometimes the conversations are telling. I’ll get a call or an email with a very high ARR number. I’ll think: I didn’t remember that company doing so well. So I reach out to the founder: ‘What happened? Why are the numbers so strong?’ And the answer is: ‘Oh yeah, it’s 365 times the revenue we made yesterday because one of our campaigns hit.’ So yeah, some of these terms have lost meaning.”
Foody chose not to provide additional comments. Sequoia did not immediately respond to a request for comment.
This report includes additional contributions from Connie Loizos.
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