Emergency post: WTF is going on at Carta?

Does this impact tech workers? And what are secondary transactions?

A few disclaimers before we get into this boondoggle:

• I’m not a reporter - I’m a humble tech CFO who thinks this (or whatever this is) is an important issue for the venture backed ecosystem

  • Also, I’m holding an infant in my left hand, typing with my right, and haven’t shaved since Thursday - not exactly TechCrunch or Axios material

• I’m currently a (happy? - tbd) Carta customer

  • I believe the financial infrastructure they’ve built for private markets revolutionized transparency, trust, and liquidity for startups

• I interviewed their CFO Charly Kevers on my podcast Run the Numbers last year, and I think he’s one of the best in the game

  • You can listen to it on Spotify and Apple

OK, let’s ride!

On Friday, Linear Founder, and Carta customer, Karri Saarinen dropped a bombshell.

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The one sentence summary would be:

Carta offers two popular products - cap table management and a platform for secondary transactions - and the founder of a company who uses Carta for cap table management thinks Carta is using confidential shareholder info to facilitate trades of his company’s stock, without his approval, on their trading platform.

But first - what are secondary transactions? And when do they occur?

What are secondary transactions?

• Privately held venture-backed companies often grant their employees stock options as a form of compensation. It also helps attract talent at a lower salary - the company gives you less cash today in exchange for unlimited upside tomorrow.

• However, these stock options are typically not liquid until the company goes public, which can take several years. As a result, many pre-IPO companies allow their employees to participate in tender offers, commonly called secondary transactions, which allow them to sell a portion of their vested shares to outside investors.

• A tender offer is a liquidity event in which a company, investor, or group of investors propose to buy a fixed number of shares from existing shareholders at a set price. Tender offers can be made for both private companies and public companies, with recent examples OpenAI and Stripe.

• It’s important to note that the company does not get any money from a secondary transaction. The balance sheet does not change. While primary dollars are used to fund future operations, M&A, and to hire more talent, there are no new shares created in a secondary transaction, as they merely change hands.

• They’re a total pain in the ass to administer. The company merely acts as an approver, book maker, and conduit by which employees and early shareholders match up with new or existing institutional shareholders. I’ve wasted dedicated hundreds of hours of my career coordinating between employees, early angels, future shareholders and the army of lawyers on both sides of the transaction. CartaX helps alleviate some of this administrative burden.

When do tender offers occur?

• Tender offers typically occur in conjunction with a later stage fundraise (Series C and beyond). This is the sweet spot where founders have been at it for long enough to take a little off the table.

• Anytime before then is usually a pretty big red flag to investors - it would be suspect if a Series A founder wanted to line their pockets before the company has achieved product market fit.

• That’s why all tender offers require board approval.

Getting rich from your pre IPO stock options

OK, now back to the story…

Here’s the crux of it all - is Carta using their private, confidential, asymmetrical information to shake loose transactions, which they would benefit from, without founder / CEO / CFO / Board approval?

Whew!

Incentives drive outcomes products

For context, it’s important to delineate between these two products that Carta offers.

The first is their “bread and butter” cap table management solution. It allows companies to keep track of who owns what as the company goes through different funding events, and different investors step on and off the cap table. As any startup CFO knows, it becomes a game of five dimensional chess to keep track of all the movements between parties, especially as the share count (denominator) and share price changes.

The second and newer product they offer is CartaX. This is a a secondary market for parties to trade shares. Think of it like the NASDAQ, but for companies who aren’t public. There are a few other well known secondary markets, like Forge Global, Hiive, and Equity Zen. The difference is, they don’t already have all the cap table information, and are usually shooting in the dark, trying to somewhat blindly aggregate supply and demand. Carta has a major leg up on them in this sense.

It’s also very crucial to understand the unit economics behind each of these products and how they are monetized. Carta’s cap table management software is an annual subscription, which usually runs companies between $5K and $10K per year. I’ve always thought it to be really cheap compared to the value we get out of it, especially considering how important / sensitive the data it’s dealing with is. Don’t tell them, but I’d willingly pay a lot more. Now, you can, of course, add on more expensive modules, like 409a valuations and total compensation benchmarking. But regardless, think of this as a sub $20K per year product.

OK, now let’s talk about CartaX. The secondary product is monetized through a commission model. While not recurring, like the SaaS product, it has a much higher ceiling.

If you follow the money, it makes you think - is the cap table product lead gen for the secondary market product? And if so, is that cool?

What’s this mean for Carta?

Carta’s #1 product isn’t cap table management - it’s trust. That’s the foundation that all their other products are built upon.

In a way, it’s the closest thing we have to blockchain (but, like, works and has real world use cases, lol). You can trace a share’s origin through certificate transfers, and you always know who holds what.

And this sounds like it wasn’t an isolated incident.

Tweet. Note: He meant to say “not random”

What’s this mean for tech CEOs and CFOs?

It’s at the board's discretion to sell shares. They should know that CartaX is an option to facilitate the process, but CartaX should never be the driver. That would be putting the cart before the horse. And even worse, it could cause an unsolicited domino effect of employees and investors looking to sell at a bad time for the company.

What’s this mean for employees at tech companies who hold shares housed by Carta?

I thought of this while making my tyrant of a two year old avocado toast for breakfast this morning - 80% of my net worth is “in” Carta.

Yes, technically my shares are “in” the companies I work / worked for (which are still private and very much illiquid). But nonetheless, it’s my financial source of record for vesting.

Sidenote - is there any email better than the monthly “you’ve just vested x shares” email from Carta? I’ve never dunked a basketball on a ten foot hoop, but I imagine it feels a lot like getting this email.

On one hand, as an employee, I like the idea of secondary transactions to help me take some money off the table. Waiting for your cash is the biggest downside of being at a startup.

But I don’t want to look like a dufus, going to my CEO or CFO to ask to sell my shares, when they never approved the transaction in the first place.

Plus, if I think macro about the situation, I’d hate it if there are some employees getting a better shot to sell their shares than me because Carta is working some deals behind the scenes but not others.

Oh yea, that other stuff that happened at Carta

Carta was in the news just a few months ago for employee harassment claims.

This type of stuff (unfortunately) happens in Silicon Valley all the time. That’s the subject of another post. Bad stuff.

But what people were talking about most was Carta’s “DIY communications strategy”.

CEO Henry Ward sent an email to Carta customers to explain the situation, which instead alerted them to a situation they 99.9% of people had any idea was going on.

From a startup’s slack channel

Also the subject line was… well… ok, it was the worst subject line I could possibly script from a company trying to avoid negative press.

And now it feels like we are watching a PR car crash in slo-mo, all over again.

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What happens now?

Carta CEO Henry held court on X, and admitted wrong doing in this situation. But most of what he typed was all like “Hey, why’d you have to do this publicly. Not cool!”

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And what he didn’t go so far as to say was if this was a systemic issue or not.

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What does this mean for Carta? IDK, I have six minutes to wrap this up before my wife rips my head off and hands me the kids so she can go to the grocery store.

But it feels a lot like the story of Icarus - Carta flew too close to the sun.

They have two amazing products, but the temptation to squeeze a little more juice out of one by using the other proved too tempting. They flew too high.

“Here is the modern reinterpretation of Icarus, depicted as soaring high in the sky with his wax wings, dangerously close to the sun, while examining a cap table from a venture-backed startup.”

Will I change platforms and leave Carta? Honestly, no. It would be a total pain in the ass to rip and replace, and there aren’t any better options for cap table management out there. I still love the UI / UX, and have selfishly invested a ton of time learning to use it. But I do think it leaves the door open to another innovative company to build something in the space.

Let me rephrase that - an innovative company willing to hire a VP of Communications.

Note: I’m publishing this at ~10AM EST on January 7th in case anything else goes down in the paint.