As funding for AI startups continues to heat up, the controversy surrounding valuation disclosure methods is also widening. Mercor co-founder Brendan Foody recently publicly questioned Sequoia Capital's practice of entering some deals in batches with different valuations, arguing that this amplifies outsiders' judgments of the company's true valuation.
The controversy points to two valuation levels
Foody stated that he has seen several similar financing rounds in the past six months: investors split the same round into two parts, with the main funds invested at a lower valuation and a smaller amount at a higher valuation. When disclosed publicly, the market often only sees the higher "top valuation" and ignores the fact that the actual average entry price for investors is lower.
TechCrunch notes that this structure is not an isolated case. Serval, an AI-powered IT help desk company, previously announced a $75 million Series B funding round, valuing the company at $1 billion. However, the Wall Street Journal reports that Sequoia Capital's actual minimum investment corresponded to a valuation of only $400 million.
A similar situation occurred with Aaru, another startup that uses AI to simulate user behavior and conduct market research. Its lead investor, Redpoint, valued the company at $450 million, but the company publicly stated a valuation of $1 billion.
Sequoia says it reflects market divergence.
Sequoia partner Shaun Maguire responded on social media, saying it's unfair to call this a "scam." He stated that he has seen similar situations about five times during his seven years at Sequoia, usually involving popular AI projects.
According to him, some investors are willing to pay higher prices for hot companies, while Sequoia is unwilling to accept the same level of pricing. Therefore, they will separate the partnership with the startup from the actual investment price, resulting in two investments with different valuations at similar times.
However, this response did not directly address the most pressing question: whether the startup had fully explained the existence of the lower-priced batch to its employees, angel investors, and other potential investors. If it only emphasizes a higher valuation, the market's perception of the company's position and investor confidence could be amplified.
Employee stock options are not necessarily priced at high valuations.
Jason Woo, a partner at valuation and financial modeling firm Armanino, said that employee stock options should theoretically be priced based on the weighted average of each batch of options, rather than directly based on the external valuation stated in the press release.
In privately held U.S. companies, employee stock options are typically valued using a 409A assessment. This independent assessment determines the fair market value of common stock and also affects the exercise price of employee stock options. Under this mechanism, employees may not necessarily bear the costs based on the "top valuation."
However, the report also points out that 409A valuations are typically low. Because a lower exercise price helps reduce a company's tax burden, both businesses and the valuation process themselves have an incentive to keep this figure low. This means that while employees may not necessarily pay a high valuation, they may also not see the full picture of the financing pricing.
The ARR (Average Revenue Flow) metric was also used to package growth.
The report mentions that in the highly competitive funding market, in addition to valuation structures, startups and investors also exaggerate or repackage ARR to strengthen their growth narratives. Niko Bonatsos, founder of Verdict Capital and former investor at General Catalyst, said he has seen some companies simply annualize their daily revenue to report inflated ARR figures.
Foody declined to comment further, and Sequoia Capital did not immediately respond to TechCrunch's formal request for comment. As AI funding remains hot, market attention to the gap between "announced valuations" and "actual transaction prices" is likely to continue to rise.
