For makers and artists building with AI, the latest valuation wars between VCs and founders are more than just financial noise; they are a warning about the integrity of the data you rely on. When investors manipulate headline numbers to inflate a startup’s worth, it distorts the market reality that creators depend on to gauge the true potential and stability of the tools they are adopting. If the “fair value” of an AI platform is artificially inflated by dual-pricing tricks, the pricing models and equity stakes for early adopters may be built on a foundation of sand.
Two tranches, one headline
Brendan Foody, co-founder of the AI talent platform Mercor, recently took to X to expose what he termed a “dual-pricing” scheme allegedly orchestrated by Sequoia Capital. Mercor, which recently secured a valuation of $10 billion, became the focal point of Foody’s critique regarding how the firm structures its investments.
“The ‘sequoia scam’ is worse than a single horror story,” Foody wrote. “in the last 6 [months] ive seen a half dozen rounds where sequoia invests in 2 tranches. everyone pretends they only did the higher valuation. founders misrepresent this to their employees & then shop it to angels too.”
Under this mechanism, a lead investor injects capital in two separate stages. A significant portion is deployed at a lower, preferential valuation, while a smaller slice is invested at a drastically higher price. The press release then announces only the inflated “headline” figure. This strategy creates a false narrative of a dominant market winner, effectively masking the investor’s actual average entry price, which remains significantly lower.
Perception versus reality
The gap between the announced figure and the actual investment cost can be substantial. When the AI-driven IT helpdesk startup Serval announced a $75 million Series B at a $1 billion valuation, the market saw a success story. However, reporting by The Wall Street Journal revealed that Sequoia’s lowest entry point actually valued the company at just $400 million — less than half the headline figure.
Similar discrepancies appear elsewhere in the sector. At Aaru, a startup utilising AI to simulate user behavior for market research, lead investor Redpoint backed the company at a $450 million valuation despite an announced headline price of $1 billion.
The investor’s defence
Shaun Maguire, a partner at Sequoia, pushed back against Foody’s characterisation of the practice as a scam. In a direct response on X, Maguire explained that this behaviour has occurred approximately five times during his seven years at the firm.
“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 framed the dual-pricing structure as a market necessity rather than a malicious maneuver. He argued that other investors are often willing to pay high multiples for hot AI deals, forcing Sequoia to decouple its company-building relationship from the capital to avoid overpaying. Whether this explanation holds water depends on what founders are telling the people who do not know about the lower tranche.
Who is being misled?
While the practice inflates perceived worth and aids in talent acquisition, calling it a “scam” may be an overreach. Jason Woo, a partner in valuation and financial modeling at Armanino, noted that employee stock options should theoretically be priced based on the blended value of all tranches — not the headline number.
A 409A appraisal is supposed to reflect a company’s fair market value, giving employees a strike price insulated from press release hype. However, there is a catch: 409A valuations are widely understood to skew low. Because a lower strike price results in a smaller tax bill for the company, there is a structural incentive to keep that number down. The appraisal designed to protect employees is, by design, not trying to reach the top of the range.
The situation is more complex for angel investors. Unlike employees receiving options, angels are writing checks directly. There is no independent appraiser standing between an angel and the valuation number a founder chooses to share. This lack of oversight makes them vulnerable to the same inflated narratives.
Beyond valuation tricks
Dual-pricing is merely one method VCs and founders use to game the perception of success in a hyper-competitive market. A more pervasive tactic involves manipulating or outright overstating annual recurring revenue (ARR).
Niko Bonatsos, a veteran at General Catalyst and founder of Verdict Capital, highlighted this issue during an event in Athens last month. He described receiving emails with very high ARR numbers that contradicted his knowledge of the company’s performance.
“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.”
Both Foody and Sequoia declined to provide further comment on the specifics of the allegations.
Key takeaways
- VCs frequently utilise dual-pricing structures, investing a large portion of capital at a low valuation while announcing a much higher headline figure to inflate perceived success.
- While this tactic may help attract talent and signal market dominance, it leaves employees and angel investors vulnerable to mispricing, as independent appraisals often skew low to reduce tax liabilities.
- The practice is defended by firms like Sequoia as a market reality for securing hot deals, yet it raises significant ethical questions regarding transparency in the AI sector.
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