Jan 8, 2024 - Business

Carta, a key tech company for startups, has a credibility problem

Illustration of an open safe revealing a spreadsheet of data.

Illustration: Annelise Capossela/Axios

Carta is one of the venture capital ecosystem's most critical companies, managing and safeguarding cap table information for around 40,000 startups.

Driving the news: Its credibility is under fire, as is an aspirational business model that helped the San Francisco-based company secure a $7.4 billion valuation.

  • Carta is sticky, but not immune to displacement.

Driving the news: Karri Saarinen, CEO of a VC-backed software startup called Linear, disclosed via social media that a Carta salesperson had contacted an angel investor in his company, telling them that Carta had a "firm buy order" for the angel's shares in Linear.

  • According to Saarinen, this angel investor is a family member who's never been publicly disclosed and who's "hardly online."
  • Moreover, Linear had never been asked to approve for such a secondary sale, which it legally would be required to do, and a VC source says that both Linear and its major investors would have had a right of first refusal.
  • In short, someone on Carta's "liquidity solutions" team had accessed Linear's confidential cap table data; leveraging the core product as lead gen for a more lucrative effort. It was a massive ethical breach, no matter how different lawyers might interpret Carta's privacy policy.
  • One VC told me it was akin to "Oracle using your database to share supply-chain data or Salesforce using your CRM data to inquire about the state of your sales leads."

Fallout: Carta CEO Henry Ward's initial response was to both apologize and publicly chastise Saarinen for publicizing the incident, rather than handling it privately.

  • In the morning, Ward is said to have spoken with several Carta board members, although there was no formal board meeting. He told them that a single employee had improperly accessed cap table data for Linear and two other companies, and that the employee had been placed on administrative leave.
  • Last night, Ward published a Medium post in which he implied this was an isolated incident and that Carta tracks and audits access to cap table data. He didn't say if a wider investigation was being launched, using such tracking capabilities, but a source says such a probe is indeed underway.
  • Ward and Carta spokespeople have declined or ignored repeated interview requests from Axios.

The big picture: The last time VCs and founders were buzzing with such concern on a Sunday was when SVB went under; with rampant suspicions that Carta has played fast and loose with cap table data that startups consider to be sacrosanct.

  • Saarinen himself now claims that he has screenshots from seven other Linear investors who'd received similar pitches from Carta salespeople, and had heard from 10 other companies with similar experiences.

The bottom line: What happens next is binary, but ultimately leads to one place.

  • One possibility is that Carta can indeed prove that just one rogue employee bypassed internal security systems, and that all the rest is just unfounded scuttlebutt. The other is that this was systemic, which among other things would endanger Ward's job — either he knew (which would be very bad) or he didn't know (which also would be very bad).
  • Either way, it's becoming clear that being both the database and market creates at least the appearance of conflict. Ward himself even acknowledges that the latter offering might need to be reevaluated; even though it's the prospect of marketplace lucre that helped drive up Carta's valuation.
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