SAN FRANCISCO — The post went up on X on a Monday morning, and within hours it had become the most discussed financing story in Silicon Valley. Brendan Foody, the chief executive of AI talent platform Mercor, accused Sequoia Capital of a practice he called “valuation manipulation”: investing in startups through two tranches at different prices, while founders present only the higher figure to employees and other investors.
“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,” Foody wrote. “The ‘sequoia scam’ is worse than a single horror story.”
The accusation lands with particular weight because of who is making it. Mercor, an AI platform that matches developers with jobs, was last valued at about $10 billion, making Foody one of the few founders wealthy and visible enough to take on the industry’s most storied firm in public. TechCrunch reported the exchange, and it quickly drew responses from investors, founders and valuation specialists who said the mechanism Foody described is real and more common than the industry admits.
The structure works like this, according to people familiar with the deals: a lead firm commits a substantial amount of capital at a lower valuation in an initial tranche, then days or weeks later closes a second, much smaller tranche at a sharply higher price. The announced round reflects only the higher tier, creating the impression that the company’s value jumped in a matter of days. Foody said he counted roughly half a dozen Sequoia rounds structured this way in the past six months.
The Wall Street Journal has documented the pattern in specific deals. When the AI helpdesk startup Serval announced a $75 million Series B at a $1 billion valuation led by Sequoia, the announcement omitted that days earlier, in a Series A extension Sequoia participated in, the company had been valued at under $400 million — less than half the headline figure. At Aaru, a startup using AI to simulate user behavior for market research, lead investor Redpoint backed the company at a $450 million valuation despite an announced $1 billion price.
Sequoia’s response came from Shaun Maguire, a partner who has led many of the firm’s AI deals. “TBH I have seen some of this behavior but I think it’s unfair to call it the ‘Sequoia scam.’ This has happened approximately five times during my seven years at Sequoia,” he wrote. His explanation framed the structure as market reality: other investors are willing to pay multiples for hot AI companies that Sequoia considers too rich, so the firm separates its relationship-building investment from its capital allocation, placing a smaller amount at the inflated price to preserve the partnership without overcommitting. “I’m not aware of anything shady here,” he added, noting that venture capital is a repeated game in which misleading people does not pay off.
The harm, Foody argued, falls on the people least able to see the full picture. Employees are granted stock options valued against the headline number, which sets expectations about what their equity is worth. Angel investors are pitched the same inflated mark when founders shop future allocations. “The difference between perception and reality is the gap between the two valuations,” he wrote. Valuation specialists agree that options should theoretically be priced on a blended basis across all tranches, said Jason Woo, a partner at Armanino who focuses on valuation and financial modeling.
Foody acknowledged that Sequoia is not the only firm using the structure, and Maguire conceded in his reply that Sequoia had passed on Mercor — a miss that gives Foody’s critique a personal edge but does not weaken the underlying claim. TechCrunch has previously reported on venture firms investing in the same round at different valuations, a practice that has grown as AI companies raise capital at speeds and prices that outpace ordinary due diligence.
The episode arrives at an awkward moment for the private markets. AI startup valuations have climbed so quickly that headline numbers are doing more work than ever: they attract talent, set option strike prices, anchor the next round and shape press coverage. The dual-pricing structure exploits that dependence, letting a firm participate in a hot deal while signaling, through its actual average price, that it doubts the number.
What the exchange did not resolve is the question Maguire’s answer sidesteps: what founders tell the people who do not already know about the lower tranche. Investors who saw the exchange said the episode will push limited partners to ask tougher questions about how portfolio valuations are composed, and founders to think twice before quoting a number that the lead investor’s own ledger contradicts. Whether the practice is deception or discipline depends on who is reading the fine print — and, increasingly, on who is asking to see it.
