Carta exits secondary trading following credibility hit

Roughly 72 hours after a prominent startup customer complained that Carta was misusing information with which it was entrusted — scaring many of Carta’s tens of thousands of other customers in the process — Carta is exiting the business that landed it in trouble with the customer.

Carta co-founder and CEO Henry Ward posted on Medium tonight that: “Because we have the data, if we are trading secondaries, people will always worry that we are using the data, even if we are not. So we have decided to prioritize trust, and exit the secondary trading business.”

It’s a dramatic turn of events for 14-year-old Carta, which originally focused on cap table management software but began over time to evolve into a “private stock market for companies” to take advantage of the network of companies and investors that already use its platform and into which it has insights. The big idea was to become the transfer agent, brokerage and clearinghouse for all private stock transactions in the world.

While the move made Carta more valuable in the eyes of its venture backers — a company has to scale, after all! — it put the company on dangerous footing after Finnish CEO Karri Saarinen posted on LinkedIn on Friday that Carta was using information about his company’s investor base to try to sell its shares to outside buyers without the company’s knowledge or consent.

Wrote Saarinen, whose project management software company Linear is four years old and a Carta customer:  “As a founder it feels kind [of] shitty that Carta, who I trust to manage our cap table, is now doing cold outreach to our angel investors about selling Linear shares to their non disclosed buyers.” Saarinen continued: “They never contacted us (their customer) about starting an order book for Linear shares. The investor they reached out to is a family member whose investment we never published anywhere. We and they never opted in to any kind of secondary sales. Yet Carta Liquidity found their email and knew that they owned Linear shares.”

While Ward apologized publicly to Saarinen, blaming a rogue employee who “violated our internal procedures and went out of bounds reaching out to customers they shouldn’t have,” Saarinen continued the discussion very publicly, saying he had identified numerous other founders whose investors had also been contacted by Carta representatives without their knowledge.

In his post tonight, Ward downplayed the impacts of ending secondary trading on Carta, saying the revenue derived from the practice is minuscule compared with Carta’s other business offerings. According to Ward, Carta’s cap table business “is about $250M/year, fund administration is about $100M, private equity is about $20M, and the secondary trading business is about $3M.” Carta, he added, has done a “decent job of building the cap table business, an ok job at fund admin (but feeling the growing pains), and an abysmal job at the secondary business.”

Further, he continued, having precious customer data that others do not isn’t the superpower that outsiders may think — certainly not if Carta is going to be a good actor in the private company ecosystem.

Ward, widely known to be brusque, strikes an uncharacteristically humble tone in the Medium post, writing, “ALL of my ideas around liquidity — auctions, investor matching, secondary trading, open tender offers, have not worked. I might not be the entrepreneur that can solve this problem.” Indeed, he continued, “Carta might not be the company that can solve this problem. Many people think we are best poised to solve liquidity because we have cap table data. But that same argument is used for data products. People say ‘You have all the data so you should put Pitchbook out of business!’ But it is precisely because we have the data, that we can’t use it. It is our customers’ data, not ours. That’s why in ten years, Carta has never released a data product. I use Pitchbook and TechCrunch when I research a company before I meet the CEO.”

“Having ground truth data is not an advantage if we can’t use it. And it is a disadvantage if people think we use it,” added Ward.

To Carta’s credit, the decision to back out of the secondary sales business came quickly; Carta also seemed to have little choice, with many founders threatening to move their startups’ business elsewhere after the events of this past weekend.

As founder Sim Desai of the financial services startup Hiive wrote on LinkedIn yesterday, [A]side from [Carta’s] apparent breach of trust (possible to fix) and their lack of expertise (hard to fix), Carta faces another impossible conflict between these two business models. Even if they are not using their customers’ confidential information, it is the optics of a potential breach that will stand in the way.”

How the move impacts Carta’s own valuation remains to be seen, as does whether the company sticks to its guns once the startup market rebounds — along with demand for secondary shares.

In the meantime, if you missed the row with Linear that set tongues wagging over the weekend, you can read our earlier coverage here.