\n<\/p>\n
Roughly 72 hours after a prominent startup customer complained that Carta<\/a> was misusing information with which it was entrusted \u2014 scaring many of Carta\u2019s tens of thousands of other customers in the process \u2014 Carta is exiting the business that landed it in trouble with the customer.<\/p>\n Carta co-founder and CEO Henry Ward posted on Medium tonight<\/a> that: \u201cBecause 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.\u201d<\/p>\n It\u2019s 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 \u201cprivate stock market for companies<\/a>\u201d 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.<\/p>\n While the move made Carta more valuable<\/a> in the eyes of its venture backers \u2014 a company has to scale after all! \u2014 it put Carta on dangerous footing after a Finnish CEO Karri Saarinen posted on LinkedIn on Friday that Carta was using information about his company\u2019s investor base to try to sell its shares to outside buyers without the company\u2019s knowledge or consent.<\/p>\n Wrote Saarinen, whose project management software company Linear<\/a> is four years old and a Carta customer:\u00a0 \u201cAs 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.\u201d Continued Saarinen, \u201cThey 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.\u201d<\/p>\n While Ward apologized publicly to Saarinen, blaming a rogue employee who \u201cviolated our internal procedures and went out of bounds reaching out to customers they shouldn\u2019t have,\u201d 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.<\/p>\n 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\u2019s other business offerings. According to Ward, Carta\u2019s cap table business \u201cis about $250M\/year, fund administration is about $100M, private equity is about $20M, and the secondary trading business is about $3M.\u201d Carta, he added has done a \u201cdecent 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.\u201d<\/p>\n Further, he continued, having precious customer data that others do not isn\u2019t the super power that outsiders may think \u2014 certainly not if Carta is going to be a good actor in the private company ecosystem.<\/p>\n Striking a humble tone, Ward wrote that \u201cALL of my ideas around liquidity \u2014 auctions, investor matching, secondary trading, open tender offers, have not worked. I might not be the entrepreneur that can solve this problem.\u201d Indeed, he continued, \u201cCarta might not be the company<\/em> 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 \u2018You have all the data so you should put Pitchbook out of business!\u2019 But it is precisely because\u00a0<\/em>we have the data, that we can\u2019t use it. It is our customers\u2019 data, not ours. That\u2019s 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.\u201d<\/p>\n \u201cHaving ground truth data is not an advantage if we can\u2019t use it. And it is a disadvantage if people think we use it,\u201d added Ward.<\/p>\n To Carta\u2019s 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\u2019 business elsewhere after the events of this past weekend.<\/p>\n As founder Sim Desai of the financial services startup Hiive wrote on LinkedIn yesterday, [A]side from [Carta\u2019s] apparent breach of trust [regarding Linear] (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\u2019 confidential information, it is the optics of a potential breach that will stand in the way.\u201d<\/p>\n How the move impacts Carta\u2019s own valuation remains to be seen. In the meantime, if you\u00a0missed the row with Linear that set tongues wagging over the weekend, you can read our earlier coverage here<\/a>.<\/p>\n<\/p><\/div>\n