VCs' Dual-Valuation Tricks Exposed

A recent wave of horror stories from founders and founders-turned-investors on X has shed light on the questionable practices of some venture capital firms. One of the most striking examples is the dual-pricing tactic, where VCs invest in two tranches at different valuations, often with the lead firm paying a lower price.

Sequoia's Dual-Valuation Scam

Brendan Foody, co-founder of Mercor, a $10 billion-valued AI talent platform, has called out Sequoia for its alleged "dual-pricing scam." Foody claims that Sequoia invests in two tranches, with the lead firm paying a lower price, while the company announces a higher valuation to attract top talent and investors. This practice, Foody argues, is unfair to employees who are not aware of the lower tranche.

The "sequoia scam" is worse than a single horror story," Foody wrote on X. "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."

TechCrunch has previously reported on VCs investing in the same round at different valuations. This practice, while not unique to Sequoia, has been most frequently associated with the firm. Foody acknowledged that other VC firms may also be using this tactic.

The Blended Value Conundrum

Jason Woo, a partner at Armanino, highlights the issue of dual-pricing structures and their impact on employee stock options. According to Woo, employee options should be priced based on the blended value of all tranches, not the headline number. However, 409A valuations, which are supposed to reflect a company's fair market value, often skew low due to tax considerations.

• The angel question is more complicated. Unlike employees, angels are writing checks, not receiving options. There is no independent appraiser standing between an angel investor and whatever number a founder chooses to share.
• Another, more pervasive tactic involves manipulating or outright overstating annual recurring revenue (ARR).

The ARR Conundrum

Niko Bonatsos, a veteran VC and founder of Verdict Capital, spoke about the issue of ARR manipulation during a recent TechCrunch event. Bonatsos shared a story about a company that claimed an unusually high ARR number, only to reveal that it was due to a single successful campaign.

• We [at Verdict] mostly invest before metrics, before product, before the company [has fully taken shape] but I do have a past portfolio, and sometimes the conversations are telling. I'll get a call or an email with a very high ARR number. 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."

Foody declined to comment further, while Sequoia did not immediately respond to a request for comment.