After A Loss Of Credibility, Carta Announces Exit From Secondary Business: “We Have Decided To Put Trust First”

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About 72 hours after a prominent startup customer complained that Carta had misused the information entrusted to it, frightening many of Carta's tens of thousands of other customers, Carta is exiting the business that led to problems with the customer.

Henry Ward, co-founder and CEO of Carta, wrote on Medium this evening: “Because we have the data, when trading secondaries people will always worry that we are using the data, even if we are not.” That’s why we decided to put trust first and withdraw from the secondary trading business.”

It's a dramatic turn of events for 14-year-old Carta, which initially focused on cap table management software but over time evolved into a “private corporate stock market” to benefit from the network of companies and Investors benefit from the fact that it already uses its platform and into which it has insights. The big idea was to become a transfer agent, broker and clearinghouse for all private stock transactions in the world.

While the move made Carta more valuable in the eyes of its venture capitalists – after all, a company has to scale! – It put the company in a dangerous situation 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 .

Saarinen, whose project management software company Linear is four years old and a Carta customer, wrote: “As a founder, it feels good [of] It sucks that Carta, who I trust to manage our cap table, is now cold-calling our angel investors to sell Linear shares to their undisclosed buyers.” Saarinen continued: “They have us (their Customers) never contacted about opening an order book for linear stocks. The investor they contacted is a family member whose investment we have not published anywhere. We and they never opted for any kind of secondary sales. But Carta Liquidity found their email and knew they owned Linear shares.”

While Ward publicly apologized to Saarinen and blamed a rogue employee who “violated our internal procedures and went above and beyond to target customers they shouldn't have,” Saarinen continued the discussion very publicly and said 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 impact of Carta ending secondary trading, saying revenue from the practice was minuscule compared to Carta's other business offerings. According to Ward, Carta's cap table business is about $250 million a year, fund management is about $100 million, private equity is about $20 million and secondary trading business is about $3 million. Dollar. Carta, he added, “did a decent job building the cap table business, a good job in fund management (but felt the growth pains) and a lousy job in secondary business.”

Furthermore, having valuable customer data that others don't have isn't the superpower outsiders might think – especially not if Carta wants to be a good player in the private company ecosystem, he continued.

Ward, widely known for it harshHe takes an unusually modest tone in the Medium post, writing: “ALL of my ideas around liquidity – auctions, investor matching, secondary trading, open tender offers – didn't work.” I may not be the entrepreneur who can solve this problem In fact, he continued, “Carta may not be the company that can solve this problem.” Many people believe that we are best equipped to solve the liquidity problem because we have cap table data. But the same argument is used for data products. People say, “You have all the data, so you should put Pitchbook out of business!” But precisely because we have the data, we can’t use it. It's our customers' data, not ours. This is why Carta has never released a data product in ten years. I use Pitchbook and TechCrunch when researching a company before meeting the CEO.”

“Having ground truth data is no advantage if we can’t use it. And it’s a disservice if people think we’re using it,” Ward added.

To Carta's credit, the decision to exit the secondary distribution business was made quickly; Carta also seemed to have little choice, as many founders threatened to move their startups' operations elsewhere after last weekend's events.

As founder Sim Desai of financial services startup Hiive wrote on LinkedIn yesterday: [A]side of [Carta’s] blatant breach of trust [regarding Linear] (possible to fix) and their lack of expertise (difficult to fix), Carta faces another impossible conflict between these two business models. Even if they don’t use their customers’ confidential information, it’s the optics of a potential security breach that stands in their way.”

How this move will impact Carta's own valuation remains to be seen, as does the question of whether the company will stay the course once the startup market picks up – and demand for secondary shares increases.

Meanwhile, if you missed the Linear dispute that caused a stir over the weekend, you can read our previous coverage here.