In recent months, the venture capital (VC) industry has been accused of using a 'dual-pricing' strategy to inflate startup valuations. Brendan Foody, co-founder of Mercor, an AI talent platform, took to X to accuse Sequoia Capital of employing this dubious practice in multiple rounds, suggesting that the higher valuation is often a misrepresentation of reality.

The mechanism works by allowing the lead VC firm to invest a significant amount at a lower valuation, while putting up a smaller portion at a drastically higher price. This creates a perception of a dominant market player, masking the fact that the real average entry price was much lower. Serval and Aaru have both been cited as examples where this tactic has been used.

Sequoia’s Shaun Maguire pushed back against Foody's claims, framing it as a market reality rather than deliberate misrepresentation. He emphasized that Sequoia is simply unwilling to pay the higher prices demanded by other investors for hot deals and must structure its participation differently. However, this explanation does not address how founders communicate these lower tranches to employees and angels.

Despite calls from some quarters to label such practices a 'scam,' the reality is more nuanced. Employee stock options should be based on blended values, which theoretically protect them from inflated headline valuations. However, 409A appraisals often skew low due to structural incentives for companies to minimize their tax burden.

The dual-pricing strategy is just one of many ways VCs and founders manipulate perceptions in a hyper-competitive market. Another common tactic involves overstating annual recurring revenue (ARR), with Niko Bonatsos, a veteran VC, noting that some founders rely on one-off campaigns to boost these figures.