In recent days, founders and founders-turned-investors have taken to X to share shocking stories about mistreatment by VCs. Their complaints ranged from VCs falling asleep during meetings to investors suggesting the founder fire the co-founder.
Brendan Foody, the founder of the AI talent platform Mercor, which has maintained a value of 10 billion dollars, even called Sequoia, arguably one of the highest VC companies in the world.
“The sequoia scam” is worse than one horror story,” Foody wrote on X. “in the last 6 [months] i saw twelve rounds where sequoia invested in 2 limits. everyone pretends to have done only the highest rating. The founders talk bad about this to their employees and then to the angels.”
TechCrunch previously reported on a VC investment in the same round at a different valuation. Under this mechanism, the lead VC firm invests a large portion of its capital at a low, premium rate, while placing a very small portion of capital at a very high price. The large “headline” rate announced creates the impression of a market winner, which hides the fact that the actual average entry rate of the top investor was much lower.
The split may be visible. For example, when AI-driven IT help desk 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 lower entry cost the company only $400 million – less than half of the title figure. The gap between those two numbers is the gap between perception and reality that Foody points to.
The Serval is not alone. At Aaru, a startup that uses AI to simulate user behavior in market research, lead investor Redpoint has backed the company with $450 million despite an announced $1 billion capitalization.
Sequoia’s Shaun Maguire pushed back on Foody’s portrayal directly. “TBH I’ve 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 about five times during the seven years I have been at Sequoia. What happens is that some investors are willing to pay a high price for a hot company – usually AI – at multiples more than what we need to pay for our company to pay for our relationship with our partners. capital, and this leads to two stages in different valuations in close succession.
“I don’t know anything bad here,” continued Maguire, “but if you saw it I would like to know. VC is a repeated game, so it makes no sense for us to try to mislead people. And if you know something, I would like to know. And in general, congratulations on the success of Mercor – it was our mistake.”
Maguire’s answer posits the trend as a market reality rather than a deliberate maneuver — Sequoia, he suggests, isn’t willing to pay what competitors will pay in hot deals, so it’s planning its participation differently. Whether that explanation fully holds depends on a question that Maguire doesn’t answer: what the founders tell people who don’t already know about the lower class.
Although Sequoia appears to be using this pricing method more often, Foody admitted that it is not the only firm using this tactic. And while double-price structures certainly increase a startup’s perceived value and help attract top talent, calling the practice a “scam” might be going too far.
That’s because an employee’s stock options must be priced based on the combined value of all tranches — not the title number — according to Jason Woo, a valuation and financial modeling partner at Armanino, whose firm provides private 409A startups used to set option prices. The 409A must reflect the fair market value of the company, giving employees a strike price locked in to any valuation announced in the press release.
There is a catch: the 409A measure is widely understood to be a rollback. Because a lower strike price means less tax for the company, there is a systematic incentive to keep that number low. Tests that are supposed to protect employees from rising headlines also, by design, don’t try too hard to reach the top of the range.
The angel question is very complicated. Unlike employees, angels write checks, they don’t get options. There is no independent appraiser standing between the angel investor and whatever number the founder chooses to share.
The dual value structure is one of the ways VCs and founders play out the idea of success in a highly competitive market. Another, more widespread tactic involves deceiving or completely exaggerating annual recurring revenue (ARR).
VC Niko Bonatsos, a veteran of General Catalyst who recently founded Verdict Capital, spoke about this issue at one of the TechCrunch events in Athens last month. “We [at Verdict] invest more before the metrics, before the product, before the company [has fully taken shape] but I have a past portfolio, and sometimes conversations are telling. I will get a call or email with the highest ARR number. I’ll think: I didn’t remember the company doing so well. So I reach out to the founder: ‘What happened? Why are the numbers so strong?’ And the answer is: ‘Oh yes, it’s 365 times the revenue we made yesterday because one of our campaigns came in.’ Therefore, some of these words no longer have meaning.”
Foody declined to comment further. Sequoia did not immediately respond to a request for comment.
– With additional reporting from Connie Loizos
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