That eye-popping startup valuation in the headline might be hiding a much smaller number underneath. And if you’re an employee holding options or an angel writing a check, that gap is your problem.
That’s the warning at the center of a public fight that erupted this week, as TechCrunch AI reports. Brendan Foody, co-founder of the $10 billion AI talent platform Mercor, took to X and named names. He called out Sequoia, one of the most elite venture firms on the planet, accusing it of what he labeled a “scam.”
What Foody actually said
“In the last 6 months I’ve seen a half dozen rounds where Sequoia invests in 2 tranches,” Foody wrote, per TechCrunch AI. “Everyone pretends they only did the higher valuation. Founders misrepresent this to their employees & then shop it to angels too.”
Here’s the mechanism. A lead VC puts most of its money in at a lower, preferential valuation. Then it drops a small slice of capital in at a much higher price. The high number becomes the “headline” valuation everyone announces. The blended price the firm actually paid? Far lower. The press release makes the company look like a runaway winner, and the real average entry cost stays quiet.
The numbers tell the story
The gap can be brutal. According to TechCrunch AI, citing The Wall Street Journal, here’s how it played out:
- Serval, an AI IT helpdesk startup, announced a $75 million Series B at a $1 billion valuation led by Sequoia. Days earlier, the company had been valued at under $400 million in a Series A extension that Sequoia also joined. Less than half the headline.
- Aaru, which uses AI to simulate user behavior, carried a $1 billion headline price while lead investor Redpoint backed it at $450 million.
Foody was clear that Sequoia isn’t the only firm doing this. It’s a market-wide tactic, especially around hot AI deals.
Sequoia pushes back
Sequoia’s Shaun Maguire didn’t dodge it. “I have seen some of this behavior but I think it’s unfair to call it the ‘Sequoia scam,'” he wrote, per TechCrunch AI. He said it’s happened roughly five times in his seven years at the firm.
His explanation: other investors will pay prices Sequoia won’t, so the firm separates its company-building relationship from the capital, and that produces two tranches at different valuations close together. “I’m not aware of anything shady here,” Maguire added, noting that “VC is a repeated game,” so misleading people makes no sense. He also congratulated Mercor, calling it “a miss for us.”
What stands out here is the question Maguire doesn’t answer: what are founders telling the people who don’t already know about the lower tranche?
Why this matters to you
This is significant because the headline valuation isn’t a neutral fact. It shapes what employees think their equity is worth and what angels pay to get in.
- Employees: Your option strike price is supposed to come from a 409A appraisal, an independent valuation of fair market value, not the press release. Jason Woo of Armanino told TechCrunch AI options should reflect the blended value of all tranches. The catch: 409A numbers skew low by design, since a lower strike means a smaller tax bill. So the safeguard isn’t really reaching for the real number either.
- Angels: You’re more exposed. No independent appraiser sits between you and whatever figure a founder decides to share. You’re trusting the number on faith.
The defensive move
Don’t anchor on the headline. Ask what the lead investor actually paid on average across every tranche. If a round closed in two pieces days apart, treat the high number as marketing until proven otherwise.
And dual-pricing is just one trick. Verdict Capital’s Niko Bonatsos described another to TechCrunch AI: founders inflating annual recurring revenue. One told him a number that was “365 times the revenue we made yesterday because one of our campaigns hit.” As Bonatsos put it, “some of these terms have lost meaning.”
Whether “scam” is the right word is debatable. Sequoia didn’t immediately respond to TechCrunch AI’s request for comment, and Foody declined to comment further. But the underlying lesson holds: in a market this hot, the number in the announcement and the number that’s real are drifting further apart. Verify before you trust. Full details are at the original TechCrunch AI report.