Mercor’s Brendan Foody calls out Sequoia over ‘dual-pricing’ valuation tricks
The Sequoia "scam" isn't just a horror story; it's the dirty secret of modern venture capital laid bare by its own beneficiaries. When Brendan Foody, founder of a $10 billion AI company, publicly names Sequoia and describes a systemic practice, the Silicon Valley veil of sophisticated, founder-friendly partnership starts to shred. What we're seeing is the formalization of a two-tiered valuation system that serves the investor class first, the founder narrative second, and the actual truth not at
Analysis
The Sequoia "scam" isn't just a horror story; it's the dirty secret of modern venture capital laid bare by its own beneficiaries. When Brendan Foody, founder of a $10 billion AI company, publicly names Sequoia and describes a systemic practice, the Silicon Valley veil of sophisticated, founder-friendly partnership starts to shred. What we're seeing is the formalization of a two-tiered valuation system that serves the investor class first, the founder narrative second, and the actual truth not at all.
The mechanics are straightforward but brilliant in their deception. A lead investor like Sequoia commits capital across two tranches in the same funding round. A substantial portion goes in at a low, private valuation. A token amount is then invested at a sky-high, headline-grabbing valuation. The company announces the round based on the latter, manufacturing a "unicorn" or decacorn narrative. Everyone—the media, future employees, subsequent investors—operates on the inflated number. Meanwhile, Sequoia's blended cost basis is dramatically lower, giving them a preferential, almost risk-free position disguised as bullish conviction.
This isn't just financial engineering; it's psychological warfare on the startup ecosystem. It creates a pervasive illusion of value that distorts everything downstream. When Foody says founders "misrepresent this to their employees & then shop it to angels too," he's pointing to the real victims. An employee who joins on the strength of a "$1 billion valuation" and accepts equity in lieu of a higher salary is making a decision based on a lie. Their options are priced against a fiction. The subsequent angel investors pouring money in are buying a narrative, not the underlying economic reality of the company's worth to its lead investor. It's a house of cards where the foundation is intentionally obscured.
The Serval example is a smoking gun. A $1 billion headline valuation is a powerful weapon. It attracts talent, commands press, and pressures competitors. But when the actual lead investment comes in at $400 million—a 60% discount—the "billion-dollar" status is pure theater. It’s not a rounding error; it’s a deliberate strategy of misrepresentation. Sequoia isn't just investing in a company; it's investing in the creation of a public myth that benefits its own portfolio optics while securing itself an unbeatable entry point.
Why would the most elite firm in the world resort to this? The cynical answer is hubris and entitlement. They believe, perhaps correctly, that their brand alone justifies the premium. Their stamp of approval is the value-add. But the more insidious reason is risk mitigation in an era of inflated valuations. By forcing this split, they insulate themselves from the very market froth they help to create. They can publicly celebrate another "unicorn" in their portfolio while privately knowing they bought the company at a price that guarantees them a massive return even in a downturn. It’s heads they win, tails the founder and early employees take the loss.
This practice shatters the foundational myth of the venture capitalist as a courageous, forward-looking partner. It reframes them as sophisticated arbitrageurs of narrative. The relationship ceases to be a true partnership and becomes something closer to a masterstroke of market manipulation. Foody's use of the word "scam" is precise. A scam relies on deception for unfair advantage. What is a two-tranche valuation if not a deliberate deception about a company's true market price to secure an unfair advantage for the investor?
One could argue this is just "how the game is played," a form of creative bookkeeping. But that defense rings hollow. If a public company used such a method to misrepresent its share price to employees or new investors, the SEC would be involved. In private markets, the lack of regulation has allowed this practice to fester, creating a profound asymmetry of information. The VC has perfect data; the founder, employee, and next-round investor are operating on curated fiction.
The real damage is to trust. The founder-VC relationship, at its best, is built on aligned incentives and brutal honesty. This practice is the antithesis of that. It tells founders that the valuation isn't about the company's true worth, but about the firm's need to craft a specific story. It tells employees that their equity is a lottery ticket with undisclosed odds. And it tells the market that "unicorn" status is a marketing exercise, not a financial milestone.
Perhaps the most telling part is the collective silence. If this is as widespread as Foody suggests, why aren't more founders speaking up? The answer is fear. Fear of being blacklisted, of losing future funding, of being labeled "difficult." Sequoia's power isn't just in its capital; it's in its ability to make or break reputations. Foody, coming from a position of strength with a $10 billion company, can afford the risk. Most cannot.
This isn't just a Sequoia problem. It's a symptom of a venture capital industry that has grown so vast and powerful that it can reshape reality itself to suit its portfolio management needs. The "headline valuation" has become a tool of financial engineering, not a reflection of value. It's a public relations instrument wielded by private equity. And until more founders with Foody's leverage break ranks, this brilliant, deceptive scam will continue to be the engine of Silicon Valley's glittering, and increasingly fictional, narrative. The real question isn't why Sequoia does it. It's why we all agree to pretend it's not happening.
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