A 7-year-old girl presented with a 3-month history of a small blue–brown papule arising within a large sebaceous nevus on her temporal scalp. A punch excision was performed that demonstrated a hybrid follicular cyst. The majority of the cyst wall displayed pilomatrical differentiation consisting of basaloid matrical-type cells with luminal shadow cell keratinization. The matrical epithelium displayed strong membranous, cytoplasmic, and nuclear staining for β-catenin. Only a small component of the wall displayed infundibular differentiation. These findings were consistent with a hybrid follicular cyst predominantly displaying pilomatrical differentiation with only a small component of infundibular lining. The most common tumors arising within sebaceous nevi are the syringocystadenoma papilliferum and trichoblastoma. Follicular cysts with infundibular (sebaceous cyst) and trichilemmal (pilar cyst) differentiation are exceedingly common, although their development within sebaceous nevi appears to be rare. We report a rare case of a hybrid follicular cyst with matrical differentiation occurring within a sebaceous nevus.