The Valuation Game: How VCs Use Dual-Pricing Tricks to Manufacture Billion-Dollar Startups:
The "Sequoia Scam"? Inside the Dual-Pricing Trick Engineering Massive Startup Valuations.
From Sequoia's controversial two-tranche deals to ARR inflation and 409A loopholes — inside the perception machine that turns promising startups into paper unicorns.
The Moment a Founder Called Out Sequoia by Name:
In the brutally honest world of founder Twitter, few posts land as hard as a direct, named accusation against one of Silicon Valley's most powerful venture capital firms. That is exactly what happened when Brendan Foody, co-founder of AI talent platform Mercor — most recently valued at $10 billion — took to X to describe what he called the "Sequoia scam."
"In the last 6 months I've seen a half dozen rounds where Sequoia invests in 2 tranches," Foody wrote. "Everyone pretends they only did the higher valuation. Founders misrepresent this to their employees and then shop it to angels too." The post ignited an immediate wave of responses from other founders and investors — some sharing similar experiences, others pushing back on the characterization. But the mechanism Foody described is real, documented, and increasingly common in the AI funding frenzy.
"The 'Sequoia scam' is worse than a single horror story. In the last 6 months I've seen a half dozen rounds where Sequoia invests in 2 tranches. Everyone pretends they only did the higher valuation." — Brendan Foody, Co-Founder, Mercor
The backdrop to Foody's post was a broader eruption of VC accountability conversations online, where founders shared everything from investors falling asleep during pitch meetings to suggestions that they fire their co-founders. The dual-pricing allegation, however, stands apart from those interpersonal grievances. It describes a structural practice with direct financial consequences for employees, angel investors, and the broader market's understanding of which companies are truly winning.
How Dual-Pricing Actually Works — And Why It Matters:
The mechanics of the dual-tranche investment structure are straightforward once you understand them, and the implications are significant. A lead VC firm — in the cases Foody described, Sequoia — invests the bulk of its capital at a lower, preferential valuation. It then puts a much smaller portion of capital in at a dramatically higher price. The higher number becomes the "headline valuation" that gets announced in press releases, reported in the tech press, and used to recruit talent and attract follow-on investors.
The result is a manufactured perception of dominance. A company that announces a funding round at a $1 billion valuation sounds like a confirmed market leader. What that headline does not reveal is that the lead investor's actual average entry price may be a fraction of that figure — meaning the investor secured substantially more equity per dollar than the press release implies.
$1B Announced Headline Valuation — Serval Series B
$400M Actual Series A Extension Valuation Days Earlier
$1B vs $450M Aaru Headline vs Redpoint's Actual Entry Valuation
Two cases reported by the Wall Street Journal and TechCrunch illustrate the gap between perception and reality. When AI-driven IT helpdesk startup Serval announced a $75 million Series B at a $1 billion valuation led by Sequoia, the full picture was more nuanced: days earlier, the company had been valued at less than $400 million in a Series A extension in which Sequoia also participated.
At Aaru, an AI startup that simulates user behavior for market research, lead investor Redpoint backed the company at a $450 million valuation despite an announced $1 billion headline price. In both cases, the gap between the announced number and the actual entry price is the gap between what the market believes and what the term sheets actually say.
Sequoia's Response — And the Question It Doesn't Answer:
Sequoia's Shaun Maguire responded to Foody's post directly on X, pushing back on the framing while acknowledging the underlying practice exists. "TBH I have seen some of this behavior but I think it's unfair to call it the 'Sequoia scam,'" Maguire wrote. "This 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 — usually AI — at multiples above what we're 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."
"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." — Shaun Maguire, Sequoia Capital
Maguire's framing positions the dual-tranche structure as a rational market response rather than a deliberate deception: Sequoia simply won't overpay for hot deals, so it structures its participation at a price it can justify while allowing a portion of the round to close at the market-clearing rate. That is a coherent explanation of the mechanics. What it does not address is the disclosure question — specifically, what founders are telling employees and angel investors who are making decisions based on the headline number and nothing else.
Foody himself acknowledged that Sequoia is not alone in using this structure. The practice appears across multiple firms and multiple rounds. What makes Sequoia a convenient symbol for the debate is its status at the very top of the VC hierarchy — if the most elite firm in the world is doing this, it signals that the behavior is normalized rather than exceptional.
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For startup employees holding stock options, the dual-pricing structure raises a direct financial concern: if the headline valuation is artificially inflated, the strike price on their options may not reflect the company's real value. This matters enormously when an employee is trying to understand what their equity is actually worth, or when they're deciding whether to exercise options before a liquidity event.
The theoretical protection against this problem is the 409A valuation — an independent appraisal that startups are required to obtain in order to set a fair market value for employee stock options. According to Jason Woo, partner in valuation and financial modeling at Armanino, the 409A is supposed to be based on the blended value of all tranches, not the headline number alone. In theory, this insulates employees from an inflated press release valuation.
In practice, the 409A system has a well-understood structural flaw. Because a lower strike price reduces employees' tax obligations at exercise, companies have a built-in incentive to keep the 409A figure as low as defensible. The appraiser whose job is to protect employees from an inflated headline valuation is also, by design, operating in an environment where all parties benefit from a conservative number. The protection is real but partial — and sophisticated employees and angels should not treat a 409A as a fully independent check on the headline.
"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 situation is more exposed for angel investors. Unlike employees, angels are writing checks — not receiving options with an appraiser standing between them and the valuation they're given. If a founder shares only the headline number when soliciting angel participation, those investors are making decisions based on incomplete information. There is no 409A backstop, no independent appraiser, and no regulatory requirement that the full two-tranche structure be disclosed in a conversation with an individual angel.
ARR Inflation — The Other Number That's Losing Its Meaning:
Dual-pricing is only one tool in the startup perception management toolkit. A second, arguably more pervasive problem involves the inflation — or outright fabrication — of annual recurring revenue figures. ARR has become the dominant metric for evaluating early-stage SaaS and AI companies, which has given founders a powerful incentive to present the number in its most favorable possible light.
Niko Bonatsos, a veteran investor who spent years at General Catalyst before founding Verdict Capital, described the dynamic with rare candor during a TechCrunch event in Athens. "I'll get a call or an email with a very high ARR number," Bonatsos recounted. "I'll think: I didn't remember that company doing so well. 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."
"It's 365 times the revenue we made yesterday because one of our campaigns hit." — How one founder explained a suddenly explosive ARR number to investor Niko Bonatsos
The 365x ARR calculation — multiplying a single day's revenue by a full year — is technically a form of annualized revenue run rate, but it bears almost no resemblance to what the term is supposed to measure. True ARR reflects contracted, recurring revenue that a business can reliably count on over the next twelve months. A campaign-driven spike that gets annualized into a press-release headline is a different animal entirely — and using it to pitch investors or justify a valuation multiple is, at minimum, a significant misrepresentation of business health.
Why This Matters for the Broader AI Investment Landscape:
The dual-pricing controversy and the ARR inflation problem are not isolated incidents — they are symptoms of a market operating under extreme competitive pressure with insufficient transparency norms. In the current AI investment environment, where a company's ability to recruit engineers, attract press coverage, and close follow-on rounds can all turn on a single headline valuation number, the incentives to inflate that number are enormous.
The consequences fall unevenly. Institutional investors, who have the access and the legal resources to request full term sheets and conduct thorough due diligence, are better positioned to see through headline valuations. Employees making career decisions based on equity packages, and individual angel investors writing checks based on founder conversations, are far more exposed. They are also, in many cases, the people the startup ecosystem most needs to attract and retain in order to function.
There is also a systemic risk when inflated valuations become the baseline for subsequent fundraising rounds. If a Series B is announced at $1 billion but the lead investor actually entered at $400 million, the Series C is going to be priced relative to a perception that was manufactured rather than earned. The further this gap compounds across successive rounds, the more dramatic the eventual correction — whether that correction comes as a down round, an IPO repricing, or a quiet acqui-hire.
When headline valuations are manufactured rather than earned, the gap between perception and reality compounds with every subsequent round — until the market corrects.
What Founders and Businesses Should Take Away:
For founders building companies in the current environment, the dual-pricing conversation carries a clear takeaway: the structure of your funding round is now a reputational asset or liability, not just a financial transaction. Employees, angels, and downstream investors are increasingly aware that headline valuations can be engineered, and founders who prioritize transparency about how a round was structured will build more durable trust with their stakeholders than those who optimize for the largest possible press release number.
For businesses evaluating AI vendors and platforms, the valuation inflation debate is a useful lens. A company that has raised at a $1 billion headline valuation may have a lead investor whose actual entry price was half that — which tells you something real about how the smart money assessed the business at the moment it wrote the check. When evaluating AI tools for your organization, the metrics that matter are product reliability, integration depth, and the vendor's ability to sustain support through market cycles — not the number in the funding announcement.
At Otherworlds AI, the Agent+ Business AI platform is built on a foundation of transparent, measurable outcomes. We do not sell headline numbers — we deliver documented workflow automation, real productivity gains, and enterprise-grade reliability that businesses can verify before they commit.
In a market where perception management has become a competitive discipline, the most trustworthy signal is a platform that lets results speak for themselves.
