The Art of the Two-Step: Multitiered Deals and the AI Valuation Gold Rush
I have been a Silicon Valley deal lawyer long enough to have seen more fundraising fads than a venture-backed closet has hoodies. But every so often, something comes along that makes me put down my cold brew and pay attention. The multitiered deal is that thing right now. The Wall Street Journal calls it “back-to-back or multitiered” fundraising. I would describe it more plainly as selling the same house twice in the same afternoon, at two very different prices, and somehow getting both buyers to show up at closing.
The structure works like this: a lead investor buys in at one valuation, and then a second tranche closes at a substantially higher number, often within weeks. Carta data shows 20 of these transactions in just the past six to twelve months, with frequency accelerating in the fourth quarter of 2025.[1] More are expected. In the AI era, patience is in short supply.
How the Two-Step Actually Works
The mechanics are straightforward, which is unusual in my line of work. Phase One involves a lead investor committing capital at a priced round, say a Series A at a $200 million post-money valuation. Phase Two closes three to eight weeks later, with additional investors participating at $500 million. The startup is now a unicorn. The lead investor has a paper gain before they have fully wired their funds. The founders are booking podcast appearances. Everyone is happy, at least for the moment.
AI startups are running this play more than anyone else, and for a reason that actually makes sense if you squint at it. A breakthrough model benchmark, a surprise enterprise contract, or a well-timed product demo can reprice a company’s future in 72 hours. That does not happen in traditional SaaS, where you need two dozen consecutive quarters of growth before someone will say the word unicorn in polite company. Forbes has written that AI valuation is increasingly driven by what they call “valuation intelligence” rather than traditional multiples, which is a generous framing, but not entirely wrong.
What’s Actually Appealing About This Structure
Early investors love it because they get marked up before the press release hits the wire. Founders love it because a splashy valuation headline is not just ego gratification; it is a talent magnet, a customer signal, and a way to stay competitive in a market where momentum matters as much as metrics. If your competitor just raised at $800 million and you are still at $150 million, recruiting your next head of engineering gets harder.
There is also a legitimate scenario where the step-up is genuinely warranted. If something material happened between Phase One and Phase Two, a partnership that changes your distribution, a product release that breaks through the noise, new enterprise commitments that de-risk the revenue outlook, then a higher valuation for the second tranche is defensible. The market moved and the pricing reflected it. That is not financial engineering; that is how capital markets are supposed to work.
Where It Gets Complicated
Some institutional investors are already declining to participate in these rounds. These are not unsophisticated people, and their skepticism is worth taking seriously. Accounting professionals have flagged complications around valuation reporting and internal controls when paper gains are recorded immediately but carry no liquidity. Inc. has reported concerns that these valuations are not always reflecting actual day-to-day revenue. None of this is surprising, but all of it is worth naming.
For founders, the downstream risks are real. Investors who paid Phase Two pricing will conduct diligence on your next round. They will find the Phase One terms. They will notice the gap. If you have not already built a clear narrative around why that gap existed and what changed in between, that conversation will be uncomfortable. Future investors will scrutinize past valuation decisions closely, and the quality of your documentation and disclosure will matter.
For investors, the core lesson is familiar but bears repeating; headline valuation is not a substitute for real diligence. Understanding who bought in at what price, on what terms, and why the pricing moved, that is now table stakes. In a market where a company’s valuation can double between Monday and Wednesday, transparency and alignment between investors tend to matter more than deal speed.
Some Practical Thoughts
Multitiered deals are not going away while AI investment remains this active. Climate tech and biotech are starting to experiment with similar structures, though with less urgency. It is a legitimate tool, and it can serve founders and investors well if handled properly.
If you are a founder considering this approach, have your legal and financial counsel pressure-test every disclosure, every economic term differential between tranches, and every investor communication before you close Phase One. Future investors will do exactly that work in due diligence, and it is far better to find the problems yourself. If you are an investor being asked to participate in a Phase Two at a meaningful step-up, ask your Phase One counterpart directly what happened between signing and now. A compelling story and a strong business are not always the same thing, and it is worth knowing which one you are actually buying.
Silicon Valley has always run on a mixture of storytelling and substance. Multitiered deals are a useful reminder that both ingredients need to be present, and that the job of good counsel is to make sure you know the difference before you wire the money.
Louis Lehot is a partner at Foley & Lardner LLP focused on emerging companies, venture capital, and growth transactions in Silicon Valley.
