Mercure’s Brendan Foudy calls out Sequoia for ‘double pricing’ valuation scams

In recent days, founders and founders-turned-investors have taken to X to share horror stories about being mistreated by venture capital firms. Their complaints ranged from venture capitalists falling asleep during pitch meetings, to investors suggesting that a co-founder fire a co-founder.

Brendan Foody, co-founder of AI talent platform Mercor, which was last valued at $10 billion, went so far as to call Sequoia arguably one of the world’s elite venture capital firms.

“The ‘Sequoia scam’ is worse than one horror story,” Foday wrote on X. “In the last 6 [months] I’ve seen six rounds where Sequoia invests in two tranches. Everyone pretends that they only made the highest rating. Founders misrepresent this to their employees and then sell it to angels as well.

TechCrunch previously reported on venture capital investments in the same round at different valuations. Under this mechanism, the lead venture capital firm invests a significant portion of its capital at a lower favorable valuation, while placing a much smaller portion of the capital at a significantly higher valuation. The huge “prime” valuation being advertised creates a perception of a dominant winner in the market, hiding the fact that the actual average entry price for the prime investor was much lower.

The disparity can be stark. For example, when AI help desk 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 lowest actual entry point values ​​the company at just $400 million — less than half the headline figure. The gap between these two numbers is the gap between perception and reality that Foday refers to.

Serval is not alone. In Aaru, a startup that uses artificial intelligence to simulate user behavior for market research, lead investor Redpoint backed the company with a $450 million valuation despite a reported headline price of $1 billion.

Sequoia’s Sean Maguire responded to Foudy’s characterization directly. “I’ve seen some of this behavior, but I think it’s unfair to call it a ‘Sequoia scam,'” Maguire wrote in response to Foody on X. “This has happened about five times in 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 a higher multiple than we are willing to pay. So we try to separate the company building relationship with our partner from the equity, and this leads to two tranches with different valuations respectively.

Maguire continued: “I’m not aware of anything suspicious here, but if you’ve seen it I’d love to know. VC is an iterative game, so it doesn’t make sense for us to try to mislead people. If anyone has done that, I’d love to know. All in all, congratulations on Mercor’s success – it’s been a loss for us.”

Maguire’s response paints this practice as a market fact rather than a deliberate maneuver — he suggests that Sequoia is simply unwilling to pay what competitors will pay for hotter deals, so it structures its engagement differently. Whether this interpretation is entirely correct depends on a question that Maguire doesn’t answer: what the founders say to people who don’t already know about the bottom bracket.

Although Sequoia appears to use this pricing mechanism most often, Foody acknowledged that it is not the only company using this tactic. Although dual pricing structures certainly inflate the perceived value of a startup and help attract top talent, calling this practice a “scam” may be a stretch.

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 Wu, a partner in valuation and financial modeling at Armanino, whose firm provides the independent 409A valuations that startups use to determine option prices. The 409A is supposed to reflect the fair market value of the company, giving employees a strike price that is insulated from any valuation announced in a press release.

There’s a problem: It’s widely understood that 409A ratings skew low. Because a lower strike price means a smaller tax bill for the company, there is a structural incentive to keep this number low. The appraisal that is supposed to protect employees from an inflated major appraisal is also, by design, not trying too hard to reach the top of the scale.

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

The dual pricing structure is just one of the ways VCs and founders manipulate the perception of success in a highly competitive market. Another, more common tactic involves manipulating or outright exaggerating Annual Recurring Revenue (ARR).

VC Niko Bonatsos, a longtime General Catalyst veteran who recently founded Verdict Capital, addressed this issue during a TechCrunch event in Athens last month. “we [at Verdict] Invest mostly before the metrics, before the product, and before the company [has fully taken shape] But I have a previous portfolio, and sometimes the conversations are telling. I will receive a call or email with a very high ARR number. I’ll think: I didn’t remember this company doing so well. So I reached out to the founder: “What happened?” Why are the numbers so strong? And the answer is: “Oh, yeah, that’s 365 times the revenue we generated yesterday because of the success of one of our campaigns.” So, yes, some of these terms have lost their meaning.

Foudy declined to comment further. Sequoia did not immediately respond to a request for comment.

—With additional reporting from Connie Loizos