AI Startups Offer Dual-Price Equity Shares

As competition intensifies among AI startups, founders and venture capitalists are adopting innovative valuation methods to project an image of market leadership.

Traditionally, top-performing companies secured rapid, successive funding rounds at ever-increasing valuations. However, because frequent fundraising pulls founders away from core product development, lead investors have created a new pricing model. This approach effectively combines what would have been two distinct funding cycles into a single round.

Recent deals using this structure include the Series A for Aaru, a synthetic-customer research startup. As reported by The Wall Street Journal, lead investor Redpoint allocated a large portion of its investment at a $450 million valuation. Redpoint then invested a smaller portion at a $1 billion valuation, with other VCs joining at that same $1 billion price point, according to our reporting. TechCrunch was first to detail Aaru's financing and its multi-tiered valuation.

This method enables promising startups like Aaru to claim unicorn status—a valuation over $1 billion—even though a substantial share of equity was sold at a lower price.

"It signals an incredibly competitive market where VC firms are fighting to win deals," said Jason Shuman, a general partner at Primary Ventures. "A massive headline valuation is also a strategic move to deter other VCs from backing the second or third-place competitors."

The impressive "headline" valuation creates the perception of a market winner, despite the lead VC's average price per share being considerably lower.

Several investors told TechCrunch they had rarely, if ever, seen a deal where a lead investor splits its commitment between two different valuation tiers in one round.

Wesley Chan, co-founder and managing partner at FPV Ventures, sees this tactic as a sign of bubble-like conditions. "You can't sell the same product at two different prices. Only airlines can get away with that," he remarked.

Typically, founders offer a discount to elite VCs because their endorsement acts as a strong market signal, aiding in recruiting talent and securing future capital.

But since these rounds are often oversubscribed, startups have found a way to manage excess demand: instead of turning away interested investors, they allow immediate participation at a significantly higher price. These investors accept the premium as the only way to secure a spot on a highly sought-after cap table.

Another example is Serval, an AI-powered IT help desk startup. According to The Wall Street Journal, lead investor Sequoia secured entry at a valuation as low as $400 million. However, Serval announced in December that its $75 million Series B valued the company at $1 billion.

While a high headline valuation can aid in recruiting talent and attracting corporate customers who may perceive the company as a market leader, the strategy carries inherent risks.

Even though the blended valuation for these companies is below $1 billion, they are now pressured to raise their next round at a valuation exceeding the headline price. Failure to do so would result in a punitive down round, Shuman explained.

These companies are in high demand today, but unforeseen challenges could make it difficult to justify their lofty valuations. A down round dilutes the ownership stakes of employees and founders. It can also undermine confidence among partners, customers, future investors, and potential hires.

Jack Selby, managing director at Thiel Capital and founder of Copper Sky Capital, cautions founders that pursuing extreme valuations is risky, citing the painful market correction of 2022. "If you put yourself on this high-wire act, it's very easy to fall off," he warned.