The gap between what the lead investor actually paid and what the world believes the company is worth becomes a chasm.
In the high-stakes theater of venture capital, where perception and reality are rarely the same currency, Mercor co-founder Brendan Foody has named a quiet practice that many in Silicon Valley have long understood but few have said aloud: top-tier firms like Sequoia invest in startups at two dramatically different prices, then allow the inflated headline valuation to shape how the world — and the company's own employees — understands what the business is worth. The accusation, directed at one of the most storied names in venture, touches something older than any single funding round: the tension between the story a market tells and the terms on which power actually moves.
- Foody's public naming of the 'Sequoia scam' cracked open a practice that insiders tolerate and outsiders rarely see — dual-tranche investments where only the flattering number gets announced.
- Real-world examples are stark: Serval's celebrated $1B Series B masked Sequoia's actual $400M entry point, and Aaru's headline valuation was more than double what lead investor Redpoint actually paid.
- Sequoia's Shaun Maguire defended the structure as market pragmatism — a way to stay in hot deals without overpaying — but left unanswered the question of what founders are telling employees and angels who only see the headline.
- Employees holding stock options are supposed to be protected by independent 409A appraisals, but those valuations are structurally incentivized to run low, leaving workers exposed to the same inflated narrative.
- The problem extends beyond dual-pricing: veteran investors describe ARR figures inflated by hundreds of times, signaling a broader ecosystem where the metrics meant to signal health have quietly lost their meaning.
Brendan Foody, who scaled AI talent platform Mercor to a $10 billion valuation, recently went public with an accusation he called the 'Sequoia scam' — a funding structure where a lead investor commits capital in two tranches at very different prices, then lets the higher number define the public narrative while the lower entry point stays hidden.
The mechanics are straightforward: a large investment goes in at a preferential valuation, followed quickly by a smaller investment at a much higher price. Only the bigger number appears in the press release. When Serval announced its $75 million Series B at a $1 billion valuation, it read as a triumph — but Sequoia's actual entry point was $400 million. At Aaru, Redpoint invested at $450 million despite a $1 billion headline. Foody said he'd seen the pattern half a dozen times in six months.
Sequoia's Shaun Maguire responded without apology, framing the structure as a rational response to a market where other investors will pay premiums Sequoia won't match. He said it had happened roughly five times in his seven years at the firm and saw no deception in it. What he didn't address was what founders tell the people who only ever hear the headline number.
That gap matters most for employees. Stock option strike prices are supposed to be set by independent 409A appraisals reflecting fair market value — but those appraisals are structurally inclined to run low, since a lower strike price reduces the company's tax burden. The mechanism meant to protect workers from inflated headlines isn't designed to push hard against them.
Angel investors face a starker problem: no appraiser stands between them and whatever number a founder chooses to share. And dual-pricing is only one tactic in a wider game. Veteran investor Niko Bonatsos described receiving calls about companies with ARR figures inflated by a factor of 365 through a single campaign. 'Some of these terms have lost meaning,' he said.
Foody stopped short of calling the practice outright fraud, and Sequoia is not alone in using it. But the structures create a durable gap between what insiders know and what the market believes — and in an environment where perception drives hiring, fundraising, and exit outcomes, that gap is anything but academic.
Brendan Foody, who built the AI talent platform Mercor into a $10 billion company, recently took to social media to describe what he calls the "Sequoia scam" — a practice where top-tier venture firms invest in the same funding round at two dramatically different prices, then let the inflated headline number do the talking while the actual terms stay quiet.
The mechanism works like this: a lead investor puts a large chunk of capital into a company at a lower, preferential valuation. Then, in close succession, it invests a much smaller amount at a much higher price. The press release announces only the bigger number. The gap between what the lead investor actually paid on average and what the world believes the company is worth becomes a chasm — and that gap is the problem Foody is naming.
When the AI-powered IT helpdesk startup Serval announced a $75 million Series B at a $1 billion valuation, the story sounded like a triumph. But according to reporting by The Wall Street Journal, Sequoia's lowest entry point valued the company at just $400 million — less than half the headline figure. The same pattern showed up at Aaru, an AI-driven market research platform, where lead investor Redpoint backed the company at a $450 million valuation despite announcing a $1 billion headline price. These aren't edge cases. Foody said he'd seen half a dozen rounds in six months where Sequoia invested in two tranches, with everyone pretending only the higher valuation existed.
Sequoia's Shaun Maguire responded directly to Foody's accusation, framing the practice not as deception but as market pragmatism. Other investors, Maguire explained, are willing to pay premium prices for hot companies — especially AI startups — at multiples Sequoia won't match. So Sequoia decouples its relationship with the company from the capital structure, investing at two different prices in quick succession. He said this has happened about five times during his seven years at the firm, and he saw nothing shady about it. "VC is a repeated game," Maguire wrote, "so it just doesn't make sense for us to try to mislead people."
But the question Maguire didn't address is what founders are telling the people who don't know about the lower tranche. Employees receiving stock options should theoretically have those priced based on the blended value of all tranches, not the headline number. That's where 409A appraisals come in — independent valuations that startups use to set option strike prices and that are supposed to reflect fair market value. Yet 409A valuations are widely understood to skew low. Because a lower strike price means a smaller tax bill for the company, there's a structural incentive to keep that number down. The mechanism designed to protect employees from inflated headlines is also, by design, not trying particularly hard to reach the top of the range.
Angels face a different problem. Unlike employees, they're writing checks, not receiving options. There's no independent appraiser standing between an angel investor and whatever number a founder chooses to share. The dual-pricing structure is just one tactic in a broader ecosystem where VCs and founders game the perception of success. Another, more pervasive one involves manipulating or overstating annual recurring revenue. Niko Bonatsos, a veteran of General Catalyst who now runs Verdict Capital, described getting calls about companies with suspiciously high ARR numbers, only to learn that a single successful campaign had inflated the figure by 365 times. "Some of these terms have lost meaning," he said.
Foody acknowledged that Sequoia isn't the only firm using dual-pricing structures, and calling the practice a "scam" may overstate the case. The structures do inflate perceived worth and help attract talent. But they also create a gap between what insiders know and what outsiders believe — and in a market where perception shapes everything from hiring to fundraising to exit valuations, that gap has real consequences.
Notable Quotes
VC is a repeated game, so it just doesn't make sense for us to try to mislead people.— Shaun Maguire, Sequoia Capital
Some of these terms have lost meaning.— Niko Bonatsos, Verdict Capital, on inflated ARR claims
The Hearth Conversation Another angle on the story
Why does it matter if Sequoia invests at two different prices in the same round? Isn't that just how markets work?
It matters because the headline number becomes the story everyone tells — to employees, to other investors, to the press. If you're an employee getting stock options, you're supposed to be priced based on the real blended value. But if the founder is only talking about the $1 billion number, you don't know the actual entry price was $400 million. That changes what your options are worth.
But Maguire says they're just unwilling to pay what competitors will pay. That sounds reasonable.
It is reasonable as a business decision. The problem is what happens next. If founders are telling employees and angels about only the higher valuation, then Sequoia's decision to invest at two prices becomes a tool for misrepresenting the company's actual value to people who don't have access to the cap table.
So the 409A appraisal is supposed to catch this?
In theory, yes. But 409A valuations skew low by design — because a lower strike price means lower taxes for the company. So the mechanism meant to protect employees from inflated headlines is also not trying very hard to reach the real top of the range.
What about the angels Foody mentioned?
Angels are the real vulnerability. They're writing checks based on whatever number the founder shares. There's no independent appraiser, no cap table transparency. If a founder only mentions the headline valuation, an angel has no way to know the lead investor actually got in at half the price.
Is this actually a scam, or is Foody just frustrated?
Probably both. Calling it a scam might be too strong — it's not illegal, and Maguire's explanation about market dynamics is genuine. But it's also a practice that systematically advantages insiders and creates information asymmetries that hurt employees and angels. That's worth naming, even if "scam" isn't the perfect word.