On an early June thread on X, Brendan Foody scrolled through term sheets and said he had seen "a half dozen rounds" in the past six months that had hollowed out Mercor's $10 billion valuation. Foody, co-founder of AI talent platform Mercor, accused lead investors of using so-called dual-pricing structures that produce headline valuations of $1 billion while most capital closed at nearer $400 million. TechCrunch and the Wall Street Journal have reported the same two-tranche phenomenon, citing examples including Serval's $75 million Series B and Aaru's $1 billion headline valuation with lower lead-investor entry points. The exchanges on X have opened a public debate among founders, investors and valuation advisers over whether the practice misleads employees and outside backers.

In the middle of the thread, Foody laid out the mechanics: a large slab of capital is placed at a lower price, and a much smaller tranche is priced higher, creating a blunt headline number for press and pitch decks.

How the two-tranche deals work

Foody said the result is a distorted signal. He pointed to headline prices such as $1 billion while lead investor entry points sit nearer $400 million, and described seeing "a half dozen rounds" using that structure in the previous six months. TechCrunch has documented the same two-tranche phenomenon, in which a big, lower-priced investment is followed by a smaller, higher-priced allocation that produces a tidy valuation for public consumption.

The Wall Street Journal reported that when AI-driven IT helpdesk startup Serval announced a $75 million Series B at a $1 billion valuation, Sequoia's earlier participation valuing the company at under $400 million had not been emphasised. Separately, Aaru, an AI market-research startup, was presented with a $1 billion headline valuation while Redpoint's lead investment was described at about $450 million. Those particulars, reported in coverage of the thread, are the examples Foody used to show the scale of the practice.

Proponents of the structure say it's a market response. In his reply on X, Sequoia partner Shaun Maguire accepted he had seen similar arrangements but rejected the suggestion of deliberate deception. "TBH I have seen some of this behavior but I think it's unfair to call it the 'Sequoia scam'," Maguire wrote, adding that the firm had encountered that pattern "approximately five times during my seven years at Sequoia." He argued the split arises in frothy sectors such as AI when other investors are willing to pay multiples Sequoia will not, prompting a separation of the company-building relationship from pure capital allocation.

Mastheads

The structure touches two distinct groups inside the startup ecosystem. Jason Woo, a partner at Armanino, pointed to the consequences for employees. He said employee stock option strike prices are supposed to reflect the blended economics of all tranches through 409A appraisals, but that those appraisals often skew low.

That creates a structural incentive to keep employee strike prices down, which can be material for retention and wealth creation.

For angels and outside investors, the exposure runs the other way. They typically have no independent appraisal between them and the number a founder shares, leaving them more exposed to headline valuations that may not mirror the lead investor's average price. Critics say the tactic can manufacture a perception of market dominance useful for publicity and recruiting. Defenders describe a pragmatic negotiation: large, established investors may insist on lower entry points while a small tranche at a higher price allows founders to present a stronger narrative to recruits and the press.

The exchanges on X were direct. Foody posted the allegations and named the pattern. Maguire replied publicly that he would welcome examples from anyone who believed misconduct had occurred, underscoring that the debate is currently among market participants rather than being routed to a regulator. There's no scheduled regulatory action or formal review referenced in the posts.

The dispute also highlights the limits of market signals in hot sectors. When valuations are driven by competitive pressure for access to fast-growing AI companies, headline numbers can become a form of recruitment and marketing. That, in turn, places more weight on private appraisals and the disclosures founders give to smaller investors and employees.

At stake is trust. Founders and lead investors argue the split-pricing tool helps close rounds in a competitive market.

Critics say it risks misleading those who lack the same access to term-sheet detail. The coverage from TechCrunch and the Wall Street Journal gave concrete examples that fed the public exchange, keeping the debate squarely in the open.

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The detail that remains most tangible is the scale Foody described: "a half dozen rounds" in six months, set against Mercor's last valuation of $10 billion.

This article was created with AI assistance.