California’s state senate recently gave final approval to a new AI safety bill, SB 53, sending it to Governor Gavin Newsom to either sign or veto.
If this all sounds familiar, that’s because Newsom vetoed another AI safety bill, also written by state senator Scott Wiener, last year. But SB 53 is narrower than Wiener’s previous SB 1047, with a focus on big AI companies making more than $500 million in annual revenue.
I got the chance to discuss SB 53 with my colleagues Max Zeff and Kirsten Korosec on the latest episode of TechCrunch’s flagship podcast Equity. Max believes that Wiener’s new bill has a better shot of becoming law, partly because of that big company focus, and because it’s been endorsed by AI company Anthropic.
Read a preview of our conversation about AI safety and state-level legislation below. (I’ve edited the transcript for length and clarity, and to make us sound slightly smarter.)
Max: Why should you care about AI safety legislation that’s passing a chamber in California? We’re entering this era where AI companies are becoming the most powerful companies in the world, and this is going to be potentially one of the few checks on their power.
This is much narrower than SB 1047, which got a lot of pushback last year. But I think SB 53 still puts some meaningful regulations on the AI labs. It makes them publish safety reports for their models. If they have an incident, it basically forces them to report that to the government. And it also, for employees at these labs, if they have concerns, gives them a channel to report that to the government and not face pushback from the companies, even though a lot of them have signed NDAs.
To me, this feels like a potentially meaningful check on tech companies’ power, something we haven’t really had for the last couple of decades.
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Kirsten: To your point about why it matters at the state level, it’s important to think about the fact that it’s California. Every major AI company is pretty much, if not based here, it has a major footprint in this state. Not that other states don’t matter — I do not want to be getting emails from the folks in Colorado or whatever — but it does matter that it’s specifically California because it’s really a hub of AI activity.
My question for you, though, Max, is it just seems like there’s a lot of exceptions and carve-outs. It’s narrower, but is it more complicated than the previous [bill]?
Max: In some ways, yes. I would say the main carve-out of this bill is that it really tries to not apply to small startups. And basically, one of the main controversies around the last legislative effort from Senator Scott Weiner, who represents San Francisco, who authored this bill, a lot of people said it could harm the startup ecosystem, which a lot of people take issue with because that’s such a booming part of California’s economy right now.
This bill specifically applies to AI developers that are [generating] more than $500 million [from] their AI models. This really tries to target OpenAI, Google DeepMind, these big companies and not your run-of-the-mill startup.
Anthony: As I understand it, if you’re a smaller startup, you do have to share some safety information, but not nearly as much.
It’s [also] worth talking about the broader landscape around AI regulation and the fact that one of the big changes between last year and this year is now we have a new president. The federal administration has taken much more of a stance of no regulation and companies should be able to do what they want, to the extent that they’ve actually included [language] in funding bills saying states cannot have their own AI regulation.
I don’t think any of that has passed so far, but potentially they could try to get that through in the future. So this could be another front in which the Trump administration and blue states are fighting.
Equity is TechCrunch’s flagship podcast, produced by Theresa Loconsolo, and posts every Wednesday and Friday.
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![Mercor’s Brendan Foody calls out Sequoia over ‘dual-pricing’ valuation tricks | TechCrunch
In recent days, founders and founders-turned-investors took to X to share horror stories about being mistreated by VCs. Their complaints ranged from VCs falling asleep during pitch meetings to investors suggesting a founder fire a co-founder.
Brendan Foody, co-founder of the AI talent platform Mercor, which was last valued at billion, went so far as to call out Sequoia, arguably one of the most elite VC firms in the world.
“The “sequoia scam” is worse than a single horror story,” Foody wrote on X. “in the last 6 [months] ive seen a half dozen rounds where sequoia invests in 2 tranches. everyone pretends they only did the higher valuation. founders misrepresent this to their employees & then shop it to angels too.”
TechCrunch has previously reported on VCs investing in the same round at different valuations. Under this mechanism, the lead VC firm invests a significant chunk of its capital at a lower, preferential valuation, while putting a much smaller portion of capital in at a drastically higher price. The massive “headline” valuation that gets announced manufactures the perception of a dominant market winner, masking the fact that the lead investor’s actual average entry price was significantly lower.
The disparity can be stark. For example, when the AI-driven IT helpdesk startup Serval announced a million Series B at a billion valuation, the announcement didn’t tell the whole story. According to The Wall Street Journal, Sequoia’s actual lowest entry point valued the company at just 0 million — less than half the headline figure. The gap between those two numbers is the gap between perception and reality that Foody is pointing at.
Serval isn’t alone. At Aaru, a startup that uses AI to simulate user behavior for market research, lead investor Redpoint backed the company at a 0 million valuation despite an announced billion headline price.
Sequoia’s Shaun Maguire pushed back on Foody’s characterization directly. “TBH I have seen some of this behavior but I think it’s unfair to call it the ‘Sequoia scam,’” Maguire wrote in response to Foody on X. “This has happened approximately five times during my seven years at Sequoia. What happens is other investors are willing to pay a high price for a hot company — usually AI — at multiples above what we’re willing to pay. So we try to decouple the company-building relationship with our partner from the capital, and this leads to two tranches at different valuations in close succession.
“I’m not aware of anything shady here,” Maguire continued, “but if you’ve seen it I’d love to know. VC is a repeated game, so it just doesn’t make sense for us to try to mislead people. And if anyone has, I’d love to know. And in general, congrats on the success of Mercor — it was a miss for us.”
Maguire’s response frames the practice as a market reality rather than a deliberate maneuver — Sequoia, he suggests, is simply unwilling to pay what competitors will pay for the hottest deals, so it structures its participation differently. Whether that explanation fully holds up depends on a question Maguire doesn’t address: what founders are telling the people who don’t already know about the lower tranche.
Although Sequoia appears to use this pricing mechanism most frequently, Foody acknowledged it isn’t the only firm using this tactic. And while the dual-pricing structures certainly inflate a startup’s perceived worth and help attract top talent, calling the practice a “scam” may be going too far.
That’s because employee stock options should theoretically be priced based on the blended value of all tranches — not the headline number — according to Jason Woo, partner in valuation and financial modeling at Armanino, whose firm provides the independent 409A appraisals startups use to set option prices. A 409A is supposed to reflect a company’s fair market value, giving employees a strike price that’s insulated from whatever valuation gets announced in a press release.
There’s a catch: 409A valuations are widely understood to skew low. Because a lower strike price means a smaller tax bill for the company, there is a structural incentive to keep that number down. The appraisal that’s supposed to protect employees from an inflated headline valuation is also, by design, not trying particularly hard to reach the top of the range.
The angel question is more complicated. Unlike employees, angels are writing checks, not receiving options. There is no independent appraiser standing between an angel investor and whatever number a founder chooses to share.
The dual-pricing structure is just one of way VCs and founders game the perception of success in a hyper-competitive market. Another, more pervasive tactic involves manipulating or outright overstating annual recurring revenue (ARR).
The VC Niko Bonatsos, a longtime veteran of General Catalyst who more recently founded Verdict Capital, addressed this issue during one of TechCrunch’s events in Athens last month. “We [at Verdict] mostly invest before metrics, before product, before the company [has fully taken shape] but I do have a past portfolio, and sometimes the conversations are telling. I’ll get a call or an email with a very high ARR number. I’ll think: I didn’t remember that company doing so well. So I reach out to the founder: ‘What happened? Why are the numbers so strong?’ And the answer is: ‘Oh yeah, it’s 365 times the revenue we made yesterday because one of our campaigns hit.’ So yeah, some of these terms have lost meaning.”
Foody declined to comment further. Sequoia didn’t immediately respond to a request for comment.
— With additional reporting from Connie Loizos
When you purchase through links in our articles, we may earn a small commission. This doesn’t affect our editorial independence.#Mercors #Brendan #Foody #calls #Sequoia #dualpricing #valuation #tricks #TechCrunchMercor,Sequoia Partners,Valuations](https://i2.wp.com/techcrunch.com/wp-content/uploads/2024/11/GettyImages-1258486979.jpg?w=1024&ssl=1 "Mercor’s Brendan Foody calls out Sequoia over ‘dual-pricing’ valuation tricks | TechCrunch
In recent days, founders and founders-turned-investors took to X to share horror stories about being mistreated by VCs. Their complaints ranged from VCs falling asleep during pitch meetings to investors suggesting a founder fire a co-founder.
Brendan Foody, co-founder of the AI talent platform Mercor, which was last valued at billion, went so far as to call out Sequoia, arguably one of the most elite VC firms in the world.
“The “sequoia scam” is worse than a single horror story,” Foody wrote on X. “in the last 6 [months] ive seen a half dozen rounds where sequoia invests in 2 tranches. everyone pretends they only did the higher valuation. founders misrepresent this to their employees & then shop it to angels too.”
TechCrunch has previously reported on VCs investing in the same round at different valuations. Under this mechanism, the lead VC firm invests a significant chunk of its capital at a lower, preferential valuation, while putting a much smaller portion of capital in at a drastically higher price. The massive “headline” valuation that gets announced manufactures the perception of a dominant market winner, masking the fact that the lead investor’s actual average entry price was significantly lower.
The disparity can be stark. For example, when the AI-driven IT helpdesk startup Serval announced a million Series B at a billion valuation, the announcement didn’t tell the whole story. According to The Wall Street Journal, Sequoia’s actual lowest entry point valued the company at just 0 million — less than half the headline figure. The gap between those two numbers is the gap between perception and reality that Foody is pointing at.
Serval isn’t alone. At Aaru, a startup that uses AI to simulate user behavior for market research, lead investor Redpoint backed the company at a 0 million valuation despite an announced billion headline price.
Sequoia’s Shaun Maguire pushed back on Foody’s characterization directly. “TBH I have seen some of this behavior but I think it’s unfair to call it the ‘Sequoia scam,’” Maguire wrote in response to Foody on X. “This has happened approximately five times during my seven years at Sequoia. What happens is other investors are willing to pay a high price for a hot company — usually AI — at multiples above what we’re willing to pay. So we try to decouple the company-building relationship with our partner from the capital, and this leads to two tranches at different valuations in close succession.
“I’m not aware of anything shady here,” Maguire continued, “but if you’ve seen it I’d love to know. VC is a repeated game, so it just doesn’t make sense for us to try to mislead people. And if anyone has, I’d love to know. And in general, congrats on the success of Mercor — it was a miss for us.”
Maguire’s response frames the practice as a market reality rather than a deliberate maneuver — Sequoia, he suggests, is simply unwilling to pay what competitors will pay for the hottest deals, so it structures its participation differently. Whether that explanation fully holds up depends on a question Maguire doesn’t address: what founders are telling the people who don’t already know about the lower tranche.
Although Sequoia appears to use this pricing mechanism most frequently, Foody acknowledged it isn’t the only firm using this tactic. And while the dual-pricing structures certainly inflate a startup’s perceived worth and help attract top talent, calling the practice a “scam” may be going too far.
That’s because employee stock options should theoretically be priced based on the blended value of all tranches — not the headline number — according to Jason Woo, partner in valuation and financial modeling at Armanino, whose firm provides the independent 409A appraisals startups use to set option prices. A 409A is supposed to reflect a company’s fair market value, giving employees a strike price that’s insulated from whatever valuation gets announced in a press release.
There’s a catch: 409A valuations are widely understood to skew low. Because a lower strike price means a smaller tax bill for the company, there is a structural incentive to keep that number down. The appraisal that’s supposed to protect employees from an inflated headline valuation is also, by design, not trying particularly hard to reach the top of the range.
The angel question is more complicated. Unlike employees, angels are writing checks, not receiving options. There is no independent appraiser standing between an angel investor and whatever number a founder chooses to share.
The dual-pricing structure is just one of way VCs and founders game the perception of success in a hyper-competitive market. Another, more pervasive tactic involves manipulating or outright overstating annual recurring revenue (ARR).
The VC Niko Bonatsos, a longtime veteran of General Catalyst who more recently founded Verdict Capital, addressed this issue during one of TechCrunch’s events in Athens last month. “We [at Verdict] mostly invest before metrics, before product, before the company [has fully taken shape] but I do have a past portfolio, and sometimes the conversations are telling. I’ll get a call or an email with a very high ARR number. I’ll think: I didn’t remember that company doing so well. So I reach out to the founder: ‘What happened? Why are the numbers so strong?’ And the answer is: ‘Oh yeah, it’s 365 times the revenue we made yesterday because one of our campaigns hit.’ So yeah, some of these terms have lost meaning.”
Foody declined to comment further. Sequoia didn’t immediately respond to a request for comment.
— With additional reporting from Connie Loizos
When you purchase through links in our articles, we may earn a small commission. This doesn’t affect our editorial independence.#Mercors #Brendan #Foody #calls #Sequoia #dualpricing #valuation #tricks #TechCrunchMercor,Sequoia Partners,Valuations")
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