Mercor’s Brendan Foody calls out Sequoia over ‘dual-pricing’ valuation tricks

In recent days, founders and founders-turned-investors took to X to share horror stories of mistreatment 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 AI talent platform Mercor, which was most recently valued at $10 billion, even went so far as to name Sequoia, perhaps one of the most elite venture capital firms in the world.

“The ‘Sequoia scam’ is worse than a single horror story,” says Foody wrote on X. “in the last 6 [months] I’ve seen half a dozen rounds where Sequoia invests in two tranches. everyone acts like they only did the higher rating. founders misrepresent this to their employees and then sell it to angels as well.”

TechCrunch has previously reported on venture capital funds investing at different valuations in the same round. Under this mechanism, the leading venture capital firm invests a significant portion of its capital at a lower, preferential valuation, while contributing a much smaller portion of its capital at a drastically higher price. The massive “headline” valuation being announced creates the perception of a dominant market winner and masks the fact that the lead investor’s actual average entry price was significantly lower.

The inequality can be great. For example, when AI-driven IT helpdesk startup Serval announced a $75 million Series B at a $1 billion valuation, the announcement didn’t tell the whole story. According to The Wall Street Journal, Sequoia’s actual lowest entry point valued the company at just $400 million – less than half its nominal figure. The gap between those two numbers is the gap between perception and reality that Foody points out.

Serval is not alone. 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 notional price of $1 billion.

Shaun Maguire of Sequoia pushed back directly to the characterization of Foody. “TBH I’ve seen some of this behavior, but I think it’s unfair to call it the ‘Sequoia scam,'” Maguire wrote in response to Foody on capital, and this leads to two tranches at different valuations in quick succession.

“I’m not aware of this,” Maguire continued, “but if you’ve seen it, I’d like to know. VC is a repeat game, so there’s just no point in trying to deceive people. And if anyone has, I’d like to know. And generally, congratulations on Mercor’s success: it was a miss for us.”

Maguire’s response frames the practice as a market reality rather than a deliberate maneuver. Sequoia, he suggests, is simply not willing to pay what competitors will pay for the best deals, so it structures its participation differently. Whether that statement fully holds up depends on a question Maguire doesn’t answer: what the founders tell the people who aren’t yet aware of the lower tranche.

While Sequoia appears to use this pricing mechanism most often, Foody acknowledges that it is not the only company using this tactic. And while the dual pricing structure certainly increases a startup’s perceived value and helps attract top talent, calling this practice a “scam” may be going too far.

That’s because employee stock options should theoretically be priced based on the blended value of all tranches — and not the face number — according to Jason Woo, partner in valuation and financial modeling at Armanino, whose firm provides the independent 409A valuations 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 isolated from the valuation announced in a press release.

There’s a catch: 409A valuations are widely believed to be low. Because a lower exercise price means a lower tax burden for the company, there is a structural incentive to keep that number low. By definition, the rating that is supposed to protect employees from too high a nominal rating also does not try particularly hard to reach the top of the range.

The angel question is more complicated. Unlike employees, angels write checks and do not receive options. There is no independent appraiser standing between an angel investor and the number a founder wants to share.

The dual pricing structure is just one of the ways VCs and founders play to the perception of success in a hyper-competitive market. Another, more pervasive tactic is to manipulate or outright overestimate annual recurring revenue (ARR).

General Catalyst VC Niko Bonatsos, a longtime General Catalyst veteran who recently founded Verdict Capital, discussed this issue last month at one of TechCrunch’s events in Athens. “We [at Verdict] usually invest before metrics, before products, before the company [has fully taken shape] but I do have a portfolio from the past, and sometimes the conversations are telling. I receive a phone call or an email with a very high ARR number. I think: I couldn’t remember that company doing so well. So I contact 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 from Connie Loizos