Why AI startups are selling the same equity at two different prices

As the competition intensifies among AI startups, entrepreneurs and venture capitalists are adopting innovative valuation strategies to create an impression of market superiority. Previously, the most coveted startups had the advantage of raising multiple funding rounds in quick succession, each at higher valuations. To mitigate the distractions associated with frequent fundraising, leading venture capitalists have introduced a new pricing model that merges what would typically be two distinct funding rounds into one. A prime example of this approach is Aaru, a synthetic-customer research startup that recently secured a Series A funding round led by Redpoint. According to reports, Redpoint invested a substantial portion of its investment based on a valuation of $450 million, followed by a smaller stake at a $1 billion valuation, with other investors joining at the same elevated price point. This multi-tiered valuation strategy allows startups like Aaru to brand themselves as unicorns—companies valued at over $1 billion—even if a significant part of their equity was purchased at a lower price. Jason Shuman, a general partner at Primary Ventures, notes that this trend reflects the fierce competition among venture capital firms to secure the best deals. He explains that a high headline valuation not only positions a startup as a market leader but also deters other investors from backing competing firms. Nevertheless, the practice of splitting capital between different valuation tiers within a single round is relatively new, and many investors have expressed concern about this approach. Wesley Chan, co-founder and managing partner at FPV Ventures, believes this tactic signals bubble-like conditions in the market. He argues that selling the same equity at different prices is generally untenable, except in specific industries. Typically, founders offer discounted rates to top-tier investors due to the powerful market signal their participation sends, which can help attract talent and future funding. However, in oversubscribed rounds, startups are finding ways to accommodate heightened investor interest by allowing participation at a premium price, securing their place in a coveted cap table. Another startup, Serval—a provider of AI-driven IT help desk solutions—also utilized this pricing strategy. While Sequoia's entry price was pegged at a $400 million valuation, Serval's recent Series B funding of $75 million positioned the company at a $1 billion valuation. While such inflated headline valuations can aid in recruiting talent and attracting corporate clients, they are also fraught with risks. If these startups fail to raise subsequent funding rounds at valuations exceeding their inflated estimates, they may face down rounds, which could diminish the ownership stakes of both employees and founders. This scenario could undermine confidence among partners, customers, future investors, and prospective hires. Jack Selby, managing director at Thiel Capital, cautions founders against the pitfalls of chasing extreme valuations, pointing to the market adjustments of 2022 as a warning. He emphasizes that engaging in this high-stakes game can lead to significant falls from grace, urging caution as entrepreneurs navigate this volatile landscape.