Mercor’s Brendan Foody calls out Sequoia, accusing it of ‘dual-pricing’ valuation tricks

Brendan Foody, co-founder of the AI talent platform Mercor, has accused Sequoia, a leading VC firm, of employing "dual-pricing" tactics in its investments. This strategy involves investing in two tranches at different valuations, where a larger portion of capital is invested at a preferential lower valuation, and a smaller amount at a significantly higher price. This creates a "headline" valuation that inflates the perceived worth of a company, masking the lead investor's actual lower entry price. Foody referred to this practice as the "Sequoia scam."

Foody highlighted an example involving Serval, an AI-driven IT helpdesk startup. Serval announced a $75 million Series B round at a $1 billion valuation led by Sequoia. However, days earlier, the company was valued at less than $400 million in a Series A extension, in which Sequoia also participated. This stark difference between the public valuation and the actual investment price creates a misleading perception for employees and angel investors.

Shaun Maguire of Sequoia defended the firm's practice, stating that it occurs when other investors are willing to pay a higher price for "hot" companies, especially in AI. He explained that Sequoia attempts to decouple its company-building relationship from the capital, leading to two tranches at different valuations. Maguire emphasized that he is unaware of any shady dealings and that misleading people would not make sense for Sequoia in the long run.

While this dual-pricing structure inflates a startup's perceived worth and attracts talent, calling it a "scam" might be an exaggeration. Employee stock options should theoretically be priced based on the blended value of all tranches, not the headline number. This is done through independent 409A appraisals that reflect a company's fair market value, protecting employees from inflated valuations. However, these appraisals are known to skew low due to tax incentives.

Angel investors, unlike employees, do not have an independent appraiser to verify valuations shared by founders. This makes them more susceptible to inflated figures. The dual-pricing structure is one of several tactics, alongside manipulating or overstating annual recurring revenue (ARR), that VCs and founders use to create a perception of success in a highly competitive market.