In recent days, founders and founders-turned-investors have taken to X to share horror stories about being mistreated by VCs. Their complaints ranged from VCs falling asleep during pitch meetings to investors suggesting a founder fire a co-founder.
Brendan Foody, co-founder of artificial intelligence talent platform Mercor, which was last valued at $10 billion, went so far as to call Sequoia arguably one of the most elite VC firms in the world.
“The ‘sequoia scam’ is worse than a single horror story,” Foody said wrote to X. “In the last 6 [months] I’ve seen half a dozen rounds where sequoia invests in 2 installments. everyone pretends they only made the highest valuation. Founders fake this to their employees and then shop it to angels.”
TechCrunch has previously reported that VCs investing in the same round at different valuations. Under this mechanism, the top VC firm invests a significant portion of its capital at a lower, premium valuation, while placing a much smaller portion of the capital at a drastically higher price. The massive “headline” valuation that is announced creates the perception of a dominant market winner, masking the fact that the actual average entry price of the lead investor was significantly lower.
The difference can be stark. For example, when AI-driven IT help desk startup Serval announced a $75 million Series B at a $1 billion valuation led by Sequoiathe announcement he didn’t tell the whole storyaccording to the Wall Street Journal. A few days earlier, the newspaper reported, the company had been valued at less than $400 million as part of a Series A expansion in which Sequoia participated — less than half of the cap. The gap between these two numbers is the gap between perception and reality that Foody points to.
Serval is not alone. At Aaru, a startup that uses artificial intelligence to simulate user behavior for market research, lead investor Redpoint backed the company at a $450 million valuation despite its announced $1 billion nominal value.
Sequoia’s Shaun Maguire pushed back about Foody’s characterization directly. “TBH I’ve seen some of this behavior, but I think it’s unfair to call it a ‘Sequoia scam,'” Maguire wrote in response to Foody on X. “This has happened about five times in my seven years at Sequoia. What happens is that other investors are willing to pay a high price for a hot company — usually AI — trying to pay multiple times what we are. our partner from the capital, and this leads to two tranches at different valuations in succession.
“I’m not aware of anything shady here,” Maguire continued, “but if you’ve seen it I’d love to know. VC is a repeat game, so there’s no point in trying to mislead people. And if anyone has, I’d love to know. And in general, congratulations on Mercor’s success — she’s been lost to us.”
Maguire’s response frames the practice as a market reality rather than a deliberate maneuver—Sequoia, he suggests, is simply unwilling to pay what competitors will pay for the hottest deals, so it structures its holdings differently. Whether that explanation is fully valid depends on a question that Maguire doesn’t answer: what the founders are telling people who don’t already know about the lower dose.
Although Sequoia appears to be using this pricing mechanism, Foody acknowledged that it is not the only company using this tactic. And while dual pricing structures certainly inflate a startup’s perceived value and help attract top talent, calling the practice a “scam” might be overstating it.
That’s because employee stock options should theoretically be priced based on the gross value of all the shares — not the title — according to Jason Woo, a valuation and financial modeling partner at Armanino, whose firm provides the independent 409A valuations startups use to set option prices. A 409A is supposed to reflect a company’s fair market value by giving employees an exercise price that is isolated from any valuation announced in a press release.
There is a catch: 409A valuations are widely understood to be low. Because a lower strike price means a smaller tax bill for the company, there is a structural incentive to maintain that number. The appraisal that’s supposed to protect employees from an inflated overall valuation also, by design, doesn’t particularly try to get to the top of the line.
The question of the angel is more complicated. Unlike employees, angels write checks, not receive options. There is no independent appraiser between an angel investor and whatever number a founder chooses to share.
The dual pricing structure is just one way VCs and founders are playing up the perception of success in a hyper-competitive market. Another, more pervasive tactic involves manipulating or outright overstating annual recurring revenue (ARR).
VC Niko Bonatsos, a longtime veteran of General Catalyst who most recently founded Verdict Capital, addressed this issue during one of TechCrunch’s events in Athens last month. “We [at Verdict] they primarily invest before the metrics, before the product, before the company [has fully taken shape] but I have a past portfolio, and sometimes the conversations tell. I will receive a call or email with a very high ARR number. I’ll think: I didn’t remember the company doing so well. So I turn 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 was successful.” So yes, some of these terms have lost their meaning.”
Foody declined to comment further. Sequoia did not immediately respond to a request for comment.
— With additional reporting by Connie Loizos
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