Jan 9, 2024 - Business

Carta still has unanswered questions, after closing liquidity business

Illustration of a hundred dollar bill with signs hanging on it that say “Closed for Ethical Reasons”.

Illustration: Shoshana Gordon/Axios

Carta yesterday decided to get out of the secondary stock trading business, as first reported by Axios and then confirmed by company CEO Henry Ward.

The big picture: This was the right move by Carta, which provides cap table management software for most VC-backed startups in the U.S., even if borne of scandal. But there are still a lot of unanswered questions.

Backstory: The move came just two days after a salesman for Carta was discovered to have used confidential customer data while trying to arrange a private stock sale.

Zoom in: The company's main competitive advantage in secondary trading was the customer data that it wasn't supposed to be leveraging for that purpose, thus eliminating that advantage if Carta was acting ethically.

  • It also has existing business relationships with most private stock issuers, but the past 48 hours had significantly eroded that goodwill.
  • In other words, it no longer had competitive advantage in what's still a small cottage industry with meager success rates. Yes, the margins are sweet — Carta charged 2% of transaction value to both the buyer and seller, per a document obtained by Axios — but the volume is low, particularly since most VC-backed company boards must grant approval.

But, but, but: Just because this was a relatively small business for Carta right now, both it and its investors had high hopes.

  • Carta's $8.5 billion valuation was at least in part based on the promise of secondary trading growth, as was its decision to hire a slew of bankers away from Wall Street firms.
  • The company's core business may remain stable, particularly now that it's stemmed the PR bleeding, but that's not necessarily what Carta's backers were buying.

Look ahead: Carta still has some explaining to do.

  • For example, was this really just one rogue employee or was there a systemic accessing of cap table information? Ward promised his board that there would be an investigation, per a source, but he didn't mention a word of it in yesterday's statement.
  • If it was just a rogue employee, how did he access the data? And, if Carta indeed tracks and audits such things, why did it not come to light until an angry founder took to social media?
  • What happens to the people Carta hired for this business? And, if being laid off with severance, will they be asked to sign NDAs that would prevent them from chatting with reporters?
  • Ward wrote in his post that "in ten years Carta has never released a data product." Hmmm .... someone had better tell Carta's data product.

A Carta spokesperson did not return a request for comment.

The bottom line: A software vendor is nothing without customer trust, and Carta clearly saw the precipice. It just took a giant step backward, but still has a few more to go.

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