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In recent days, founders and founders-turned-investors took to X to share horror stories<\/a> about being mistreated by VCs. Their complaints ranged from VCs falling asleep during pitch meetings to investors suggesting a founder fire a co-founder.<\/p>\n Brendan Foody, co-founder of the AI talent platform Mercor, which was last valued at $10 billion<\/a>, went so far as to call out Sequoia, arguably one of the most elite VC firms in the world.<\/p>\n \u201cThe \u201csequoia scam\u201d is worse than a single horror story,\u201d Foody wrote on X<\/a>. \u201cin 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.\u201d<\/p>\n TechCrunch has previously reported on VCs<\/a> investing in the same round at different valuations. Under this mechanism, the lead VC firm invests a significant chunk of its capital at a lower, preferential valuation, while putting a much smaller portion of capital in at a drastically higher price. The massive \u201cheadline\u201d valuation that gets announced manufactures the perception of a dominant market winner, masking the fact that the lead investor\u2019s actual average entry price was significantly lower.<\/p>\n 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\u2019t tell the whole story. According to The Wall Street Journal, Sequoia\u2019s actual lowest entry point valued the company at just $400 million \u2014 less than half the headline figure. The gap between those two numbers is the gap between perception and reality that Foody is pointing at.<\/p>\n Serval isn\u2019t alone.\u00a0At 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.<\/p>\n Sequoia\u2019s Shaun Maguire pushed back<\/a> on Foody\u2019s characterization directly. \u201cTBH I have seen some of this behavior but I think it\u2019s unfair to call it the \u2018Sequoia scam,\u2019\u201d Maguire wrote in response to Foody on X. \u201cThis has happened approximately five times during my seven years at Sequoia. What happens is other investors are willing to pay a high price for a hot company \u2014 usually AI \u2014 at multiples above what we\u2019re 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. <\/p>\n \u201cI\u2019m not aware of anything shady here,\u201d Maguire continued, \u201cbut if you\u2019ve seen it I\u2019d love to know. VC is a repeated game, so it just doesn\u2019t make sense for us to try to mislead people. And if anyone has, I\u2019d love to know. And in general, congrats on the success of Mercor \u2014 it was a miss for us.\u201d<\/p>\n Maguire\u2019s response frames the practice as a market reality rather than a deliberate maneuver \u2014 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\u2019t address: what founders are telling the people who don\u2019t already know about the lower tranche.<\/p>\n Although Sequoia appears to use this pricing mechanism most frequently, Foody acknowledged it isn\u2019t the only firm using this tactic. And while the dual-pricing structures certainly inflate a startup\u2019s perceived worth and help attract top talent, calling the practice a \u201cscam\u201d may be going too far.<\/p>\n That\u2019s because employee stock options should theoretically be priced based on the blended value of all tranches \u2014 not the headline number \u2014 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\u2019s fair market value, giving employees a strike price that\u2019s insulated from whatever valuation gets announced in a press release.<\/p>\n There\u2019s 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\u2019s supposed to protect employees from an inflated headline valuation is also, by design, not trying particularly hard to reach the top of the range.<\/p>\n 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.<\/p>\n The dual-pricing structure is just one of way 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). <\/p>\n The VC Niko Bonatsos, a longtime veteran of General Catalyst who more recently founded Verdict Capital, addressed this issue during one of TechCrunch\u2019s events<\/a> in Athens last month. \u201cWe [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\u2019ll get a call or an email with a very high ARR number. I\u2019ll think: I didn\u2019t remember that company doing so well. So I reach out to the founder: \u2018What happened? Why are the numbers so strong?\u2019 And the answer is: \u2018Oh yeah, it\u2019s 365 times the revenue we made yesterday because one of our campaigns hit.\u2019 So yeah, some of these terms have lost meaning.\u201d<\/p>\n Foody declined to comment further. Sequoia didn\u2019t immediately respond to a request for comment.<\/p>\n \u2014 With additional reporting from Connie Loizos<\/em><\/p>\n<\/div>\n When you purchase through links in our articles, we may earn a small commission<\/a>. This doesn\u2019t affect our editorial independence.<\/em><\/p>\n