level: business
brendan foody, co-founder of ai talent platform mercor, publicly criticized sequoia on x for a practice he called the 'sequoia scam'. he claimed that in the last six months he saw multiple rounds where sequoia invested in two tranches at different valuations, with founders only promoting the higher number. this makes the company appear more valuable than the average price paid by the lead investor.
the mechanism works by having the lead vc put most of its money in at a lower, preferential valuation, while a smaller amount goes in at a much higher price. the announced headline valuation creates a perception of market dominance. for example, ai helpdesk startup serval announced a $1 billion valuation, but days earlier it had been valued under $400 million in a round where sequoia participated. similarly, ai simulation startup aaru had a $1 billion headline price while lead investor redpoint backed it at $450 million.
sequoia's shaun maguire responded that the firm uses this structure when other investors are willing to pay far more than sequoia thinks a company is worth. he said it happens rarely and is not meant to mislead. however, the practice can affect angel investors who rely on the headline number without an independent appraisal. employee stock options are theoretically based on 409a valuations, which are supposed to reflect fair market value, but these appraisals often skew low for tax reasons, leaving a gap between perception and reality.
why it matters: inflated valuations distort market signals and can mislead employees and early investors about a startup's true worth.