A cohort of artificial intelligence startups has begun employing a novel financing structure that allows them to sell identical equity stakes at drastically different prices to separate investor groups, enabling companies to claim unicorn valuations whilst offering early backers significantly discounted entry points, according to multiple reports from industry observers.
The practice, detailed in recent TechCrunch AI reporting, involves structuring funding rounds with tiered pricing mechanisms that assign different per-share values to the same class of equity based on investor type or commitment size. This allows startups to headline a billion-dollar valuation based on the higher price tier whilst simultaneously attracting capital at lower valuations from investors seeking better terms.
Mechanics of the Dual Structure
Unlike traditional funding rounds where all investors in a given series pay the same price per share, these arrangements create parallel pricing tracks within a single financing event. A startup might, for example, offer shares to strategic corporate investors at £10 per share—establishing a £1.2 billion valuation—whilst selling the same equity to venture firms at £6 per share, representing a £720 million valuation.
The disparity is typically justified through varying liquidity terms, information rights, or board representation, though the economic ownership remains functionally identical. Legal structures permit this approach provided disclosure requirements are met, though transparency varies considerably across deals.
Market Drivers and Adoption
The tactic has gained traction as AI startups face mounting pressure to demonstrate escalating valuations amidst a competitive funding environment. With generative AI companies having raised over £40 billion globally since 2023, according to data aggregators, the imperative to signal momentum through headline valuations has intensified.
Several factors enable the practice. Corporate strategic investors, eager to secure partnerships or technology access, often accept premium pricing that venture firms would reject. Meanwhile, venture investors willing to accept longer lock-up periods or reduced governance rights can negotiate discounts that improve their return profiles.
Who Benefits, Who Loses
Startups gain the ability to announce impressive valuations for recruitment, press coverage, and competitive positioning whilst still closing rounds at prices their cap tables can support. Founders retain more equity than they would if all investors paid the lower price, and they secure capital from parties who might otherwise balk at the higher valuation.
Early-stage venture investors willing to accept less favourable terms benefit from access to oversubscribed deals. Corporate investors obtain strategic positioning despite paying premiums.
Later-stage investors and employees face the greatest risks. Secondary market participants may overpay based on inflated headline valuations, whilst employee stock options priced off the higher tier create tax complications and unrealistic expectations. If companies eventually exit below the announced valuation, dilution and preference stacks can eliminate common shareholder returns entirely.
Regulatory and Market Implications
The practice exists in a grey zone of disclosure requirements. Whilst private companies must inform investors about share pricing within a round, public announcements rarely detail the dual structure. This asymmetry leaves market observers, potential employees, and later investors operating with incomplete information.
Venture capital firms interviewed by industry outlets expressed concerns that widespread adoption could erode trust in startup valuations more broadly. “If every AI company can manufacture a unicorn valuation through financial engineering, the signal value of that milestone disappears entirely,” one partner noted.
Accounting firms have begun scrutinising these structures for their implications on 409A valuations, which determine employee option strike prices. Significant disparities between investor tiers can trigger IRS scrutiny and create tax liabilities for option recipients.
What Comes Next
Industry observers anticipate increased pressure for standardised disclosure as the practice spreads beyond AI into other high-growth sectors. Limited partners in venture funds are beginning to request detailed breakdowns of portfolio company valuations, including any multi-tier pricing structures.
The true test will arrive when these companies pursue exits. If acquisitions or public offerings occur below headline valuations, the resulting preference stack complications and investor disputes could prompt regulatory intervention or industry self-regulation.
For now, the dual valuation approach represents another data point in the ongoing tension between startup growth imperatives and market transparency, with AI companies once again at the vanguard of financial innovation that may reshape funding norms across the technology sector.
