Mercor’s Brendan Foody Accuses Sequoia of ‘Dual-Pricing’ Valuation Tricks

Recently, founders and those who have become investors have been sharing on X their horror stories about mistreatment by VCs. Complaints range from VCs falling asleep during pitch meetings to investors suggesting that a founder should fire a co-founder.

Brendan Foody, co-founder of the AI talent platform Mercor—last valued at $10 billion—went so far as to call out Sequoia, arguably one of the world's most elite VC firms.

“The 'Sequoia scam' is worse than a single horror story,” Foody wrote on X. “In the last six months, I've seen about half a dozen rounds where Sequoia invests in two tranches. Everyone pretends they only did the higher valuation. Founders misrepresent this to their employees and then shop it to angels too.”

TechCrunch has previously reported on VCs investing in the same round at different valuations. Under this mechanism, the lead VC firm invests a significant portion of its capital at a lower, preferential valuation, while putting a much smaller amount at a drastically higher price. The massive “headline” valuation that gets announced manufactures the perception of a dominant market winner, masking the fact that the lead investor's actual average entry price was significantly lower.

The disparity can be stark. For example, when the 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 the headline figure. The gap between those two numbers is the gap between perception and reality that Foody is pointing out.

Serval isn't 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 $1 billion headline price.

Sequoia's Shaun Maguire pushed back directly on Foody's characterization. “TBH, I have seen some of this behavior, but I think it's unfair to call it the 'Sequoia scam,'” Maguire wrote in response to Foody on X. “This has happened approximately five times during my seven years at Sequoia. What happens is that 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.

“I'm not aware of anything shady here,” Maguire continued, “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 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 participation differently. Whether that explanation fully holds up depends on a question Maguire doesn't address: what founders are telling the people who don't already know about the lower tranche.

Although Sequoia appears to use this pricing mechanism most frequently, Foody acknowledged it isn't the only firm using this tactic. And while the dual-pricing structures certainly inflate a startup's perceived worth and help attract top talent, calling the 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—not the headline number—according to Jason Woo, partner in valuation and financial modeling at Armanino, whose firm provides the independent 409A appraisals startups use to set option prices. A 409A is supposed to reflect a company's fair market value, giving employees a strike price that's insulated from whatever valuation gets announced in a press release.

There's a catch: 409A valuations are widely understood to skew low. Because a lower strike price means a smaller tax bill for the company, there is a structural incentive to keep that number down. The appraisal that's supposed to protect employees from an inflated headline valuation is also, by design, not trying particularly hard to reach the top of the range.

The angel question is more complicated. Unlike employees, angels are writing checks, not receiving options. There is no independent appraiser standing between an angel investor and whatever number a founder chooses to share.

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

The VC Niko Bonatsos, a longtime veteran of General Catalyst who more recently founded Verdict Capital, addressed this issue during one of TechCrunch's events in Athens last month. “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 declined to comment further. Sequoia did not immediately respond to a request for comment.

— With additional reporting from Connie Loizos