Mercor Founder Accuses Sequoia of Startup Valuation Manipulation

Brendan Foudy, co-founder of AI recruitment platform Mercor, has publicly accused leading venture capital firm Sequoia of manipulating startup valuations. In a post on X*, Foudy claimed that over the past six months, he had observed multiple funding rounds where Sequoia invested in two tranches at different company valuations. Only the higher valuation was publicly announced, creating a misleading impression of the company’s actual worth.

This practice is not new: funds often invest the bulk of their capital at a lower valuation while allocating a smaller portion at an inflated one to craft an attractive public image. For instance, AI support solutions startup Serval announced a $75 million round at a $1 billion valuation, despite Sequoia previously participating in a round valued at under $400 million. The discrepancy highlights the gap between public perception and reality.

Sequoia partner Shaun Maguire dismissed the allegations, calling the practice a market reality. He argued that the firm simply isn’t willing to match the high valuations competitors offer for promising startups, particularly in artificial intelligence. However, experts warn that such tactics can mislead employees and external investors, as stock option values for employees should theoretically be based on a weighted average of all tranches.

The issue is compounded by the fact that independent valuations (409A), used to determine stock option pricing, are often understated to reduce a company’s tax burden. For angel investors, the situation is even more challenging: they invest directly without intermediaries and may receive distorted information from founders.

Such valuation manipulations are just one way venture capital firms and startups create the illusion of success. Another common tactic is inflating annual recurring revenue (ARR) by leveraging one-time revenue spikes to produce impressive figures.