Carta, the cap table management company, is accused of unethical tactics by a well-known startup – TechCrunch

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Carta, an ambitious 14-year-old Silicon Valley company, has gone through numerous iterations over time. Originally inviting investors, startups and employees to use its software to manage their capitalization tables, it later sought to evolve into a “private stock market for companies,” as founder Henry Ward once told TechCrunch. As he explained in 2019: “Now that you have this network of companies and investors on one platform and can transfer securities, you can build liquidity on top of that.”

The strategy has boosted Carta's valuation in recent years. But a prominent customer is now accusing Carta of misusing sensitive information that startups entrust to the company to pursue their own goals. The claim raises broader questions about Carta's operations, even as Carta argues the incident was an isolated incident.

The dispute dates back to Friday, when Finnish CEO Karri Saarinen posted on LinkedIn that he had received surprising news about Linear, the project management software company he co-founded four years ago that raised $35 million in funding this fall had collected. Linear is a Carta customer, and according to Saarinen, a Carta representative contacted a Linear angel investor on Friday without his consent or knowledge and told him that Carta had a “firm purchase order” from an interested party to one certain price, even though that buyer might be willing to “pay higher,” the Carta official said in an email.

As it turns out, Linear is perfectly happy with its current shareholders, and this angel investor is related to Saarinen, so immediately alerted him to the email contact. Feeling betrayed by Carta, Saarinen took to LinkedIn and blasted the company.

“This could mean the end of Carta as a trusted platform for startups,” he wrote. “As a founder, it seems pretty shitty to me that Carta, who I trust to manage our cap table, is now cold-bloodedly approaching our angel investors to sell Linear shares to their undisclosed buyers.” Saarinen continued: “You have never contacted us (their clients) 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.”

After the post took on a life of its own — thousands liked it and received nearly 800 comments — Ward jumped into the conversation to apologize. Ward also said the email sent to Linear's investor was not condoned by Carta. Ward wrote: “Hello Karri and everyone, I’m appalled that this happened. We are still investigating, but it appears that on Friday morning an employee violated our internal procedures and went out of range to address customers they should not have addressed. This impacted Karri's company and two other companies. We have contacted the other two companies and are continuing to investigate. If you have any further information, please contact me directly at [email protected] to let me know as we continue our investigation.”

Ward did not respond to TechCrunch's request for further information yesterday. But Saarinen wasn't reassured by Ward's public apology. He continued to post on LinkedIn that the incident appeared to be anything but isolated. “So far I have heard from four of our investors who were approached with the same email. They were all early pre-seed investors. I've also heard of two companies that this happened to. One of them is a well-known AI company.”

Saarinen too published separately on X that: “I have learned from several companies that this has been going on for months or even years, with investors or employees of private companies being asked by Carta employees to offer their shares for sale.” These people have not agreed to this and the companies did not authorize these sales.”

Last night, Saarinen wrote on LinkedIn that he had finally spoken to Ward and that “nothing” Ward told Saarinen had “really changed” his position.

In response to an interview request, Saarinen told TechCrunch that he is “pulling out of this fight, it has already taken up too much time.” . My trust in Carta has not recovered after speaking to the CEO.” Saarinen added: “I hope Carta takes action on this matter, but we will probably move to another service as we no longer have trust in them .”

An open question now is how much leeway Carta allows itself in its contracts with its customers. They may not have the protection they imagined. In a “master subscription agreement” that a startup sent to TechCrunch, the wording about protecting customer data is noticeably vague.

The same customers follow the conversation and compare notes. As one founder told TechCrunch this morning: “I’m a Carta customer. I just learned about the strange things that come with offering secondaries behind companies' backs. This doesn't affect me, but I would be angry if I found out that they were selling shares in my company without my knowledge. I’m definitely thinking about changing platforms.”

Asked about the situation with Linear, venture capitalist Matt Murphy of Menlo Ventures, who is one of Carta's board members, tried to defuse the situation by repeating what Ward Saarinen had said on Linkedin. “Carta does not use customer cap table data,” Murphy wrote to TechCrunch. “The Cap Table business and the CartaX (Private Stock Liquidity) business are separate business units with separate teams and leadership. There was a breach of this protocol by a member of the CartaX team which was addressed and from which we have learned.”

Carta is trying to “bring legitimacy to a chaotic market,” Murphy added, noting that these days “almost every board meeting I go to has an employee selling stock and we have to allow that and exercise that.” [right of first refusal] and sometimes block when we can.”

In fact, Murphy suggested that Carta's process for such sales is typically both straightforward and ethical. “With Carta, they have a tendering product where they coordinate directly with the company to support a process that they would undertake. Then, in the case of the CartaX marketplace, we verify a buyer and confirm their demand. We then use public data sources such as Crunchbase and Pitchbook to find a potential offer that suits the buyer.”

However, given Saarinen's very different experiences, he doesn't seem to care about what is typical of Carta. “Carta mentions in their PDF FAQ that 'most secondary transactions are subject to corporate approval,'” he noted on LinkedIn. “But they are still taking buy orders and sending spam to our investors even though they know they won’t be approved.”

For Carta, the unflattering attention is the latest in a string of bad publicity. It's been so consistent that Ward even emailed customers in October telling them to read a Medium post of his if they were worried about “negative press” surrounding the outfit. The move appeared to simply serve to draw more attention to the many reported issues the company is struggling with.

For example, Carta started 2023 with a lawsuit against its former CTO and has been involved in numerous other lawsuits over the years. Among them: In 2020, the company's former marketing vice president sued Carta, accusing the company of gender discrimination, retaliation, wrongful termination and violating the California Equal Pay Act, which TechCrunch profiled here. Shortly thereafter, four employees spoke publicly to The New York Times, telling the newspaper that they were fired, demoted or given pay cuts when they raised concerns about the company's leadership.