Mercor co-founder Brendan Foody has publicly criticized Sequoia Capital, accusing the venture firm of using two-tier investment structures that can create inflated headline valuations for startups.
In a post on X, Foody said he had seen several funding rounds over the past six months in which Sequoia invested in two separate tranches at different prices.
“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.”
Different valuations in the same round
The structure involves a lead investor putting a large amount of money into a company at a lower valuation while committing a smaller amount at a much higher price.
The higher figure becomes the headline valuation announced publicly, even though the lead investor’s average purchase price is lower.
TechCrunch has previously reported on such arrangements.
Examples cited
According to The Wall Street Journal, AI IT support startup Serval announced a $75 million Series B at a $1 billion valuation, led by Sequoia.
The Journal reported that only days earlier, the company had been valued at less than $400 million during a Series A extension in which Sequoia also participated.
Another example involved Aaru, an AI startup focused on market research.
Lead investor Redpoint backed Aaru at a $450 million valuation, despite the company announcing a headline valuation of $1 billion.
Sequoia responds
Sequoia partner Shaun Maguire disputed Foody’s description.
“TBH I have seen some of this behavior but I think it’s unfair to call it the ‘Sequoia scam,'” Maguire wrote on X.
“This has happened approximately five times during my seven years at Sequoia.”
According to Maguire, some investors are willing to pay higher prices for fast-growing AI companies than Sequoia is prepared to accept.
“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,” he wrote.
“I’m not aware of anything shady here, but if you’ve seen it I’d love to know.”
Maguire added:
“VC is a repeated game, so it just doesn’t make sense for us to try to mislead people.”
He also congratulated Foody on Mercor’s growth, writing that the company “was a miss for us.”
Impact on employees and angel investors
Foody’s criticism focused partly on how valuations are communicated to employees and angel investors.
According to Jason Woon, a partner in valuation and financial modeling at Armanino, employee stock options are generally based on the blended value of all investment tranches through independent 409A valuations, rather than on the headline number.
Angel investors, however, do not have such protections because they invest directly.
Debate over startup metrics
The discussion comes amid wider concerns about how startups and investors present performance figures.
Speaking at a TechCrunch event in Athens last month, Niko Bonatsos, founder of Verdict Capital and a former General Catalyst investor, said annual recurring revenue figures are sometimes presented in misleading ways.
“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,” Bonatsos said.
He said one founder explained that the figure represented “365 times the revenue we made yesterday because one of our campaigns hit.”
“So yeah, some of these terms have lost meaning,” Bonatsos said.
Foody declined to comment further. Sequoia did not immediately respond to a request for comment.
TL;DR
Mercor CEO Brendan Foody accused Sequoia of using two-tier funding structures that create inflated headline valuations. Sequoia partner Shaun Maguire defended the practice, saying it reflects differences in pricing expectations among investors.
AI summary
- Mercor’s Brendan Foody criticized Sequoia’s valuation practices.
- He alleged some funding rounds involve two tranches at different prices.
- Shaun Maguire said the approach has occurred about five times during his seven years at Sequoia.
- Examples involving Serval and Aaru highlighted differing valuation levels.
- Investors and founders are facing broader scrutiny over startup metrics and valuations.
