Carta, the cap table management outfit, is under fire for their alleged unethical tactics by a customer. The concerning accusation sparked worry for the future of Carta as a trusted platform for startups.
Founded 12 years ago in Silicon Valley, Carta has gone through various transformations, starting as a software platform for investors, startups, and employees to manage their cap tables. Over time, they evolved to become a “private stock market for companies,” as founder Henry Ward shared with TechCrunch in 2019. Ward explained, “With this network of companies and investors on one platform and the ability to transfer securities, we can build liquidity on top of it.”
This strategy has led to a increase in Carta’s valuation in recent years. However, a well-known customer is now accusing Carta of misusing sensitive information provided by startups for their own benefit. This claim has raised concerns about Carta’s operations, despite their claim that the incident was isolated.
On Friday, CEO Karri Saarinen of Finnish startup Linear, posted on LinkedIn about Carta’s actions. Linear, a project management software company that recently raised $35 million in funding, is a customer of Carta’s. Saarinen shared that without his knowledge or consent, a Carta representative had contacted an angel investor in Linear. The email stated that Carta had a firm buyer interested in purchasing Linear shares at a specific price, with the potential for a higher amount. The email also mentioned that the buyer had not been disclosed.
The angel investor was related to Saarinen, who was immediately made aware of the situation. Feeling betrayed by Carta’s actions, Saarinen expressed on LinkedIn, “This might be the end of Carta as the trusted platform for startups. As a founder, it feels quite terrible that Carta, a company we trust to manage our cap table, would do cold outreach to our angel investors about selling Linear shares to their undisclosed buyers.” He continued, “Carta never contacted us, their customer, about starting an order book for Linear shares. The investor they reached out to is a family member, and our investment was never public knowledge. Neither Linear nor ourselves agreed to any secondary sales with Carta. Yet, Carta Liquidity somehow found their email and knew they owned shares in Linear.”
Saarinen’s post quickly gained traction, with thousands of likes and nearly 800 comments. Carta’s Ward apologized for the situation and stated that the email sent to the Linear investor was not condoned by the company. In his response, Ward said, “I am appalled by this incident. We are still investigating, but it appears that one of our employees violated internal procedures by reaching out to customers they shouldn’t have. This has affected Karri’s company and two others. We have reached out to the other two companies and are continuing our investigation. If you have any information, please contact me directly at henry.ward@carta.com so we can follow up with our investigation.”
TechCrunch reached out for additional information from Ward, but has not received a response.
Saarinen did not believe the incident was isolated and stated, “So far, I’ve heard from four of our investors who received the same email. All of them were early pre-seed investors. I have also heard from two companies that experienced the same situation. One of them is a significant AI company.”
In a later post on LinkedIn, Saarinen revealed, “Multiple companies have shared with me that this has been happening for months, if not years, where investors or employees from private companies are solicited by Carta employees to sell their shares. These individuals have not consented, and the companies have not approved these sales.”
When asked to comment, Saarinen informed TechCrunch via email that he is stepping back from the situation. “I’m retiring from this fight; it has already consumed too much of my time…My trust in Carta hasn’t recovered after talking to the CEO.” He added, “I hope Carta takes action on these issues, but it’s likely we will switch to a different service, as we no longer have confidence in them.”
TechCrunch also contacted several members of Carta’s board for their opinion on the matter.
One of them, venture capitalist Matt Murphy of Menlo Ventures, shared a similar statement to Ward’s response to Saarinen on LinkedIn. Murphy wrote in an email, “Carta does not use customer cap table data. The cap table business and the CartaX (private stock liquidity) business operate as separate entities with their own teams and management. Due to a breach of protocol by an employee on the CartaX team, we took action and learned from this experience.”
However, startup founders are following the conversation and sharing their own experiences. One founder told TechCrunch, “I am a Carta customer, and I just learned about the questionable activities surrounding them, offering secondaries behind companies’ backs. It hasn’t affected me yet, but I would be outraged if I found out they were selling my company’s shares without my knowledge. I am considering switching platforms.”
Murphy explains that companies typically have to approve secondary transactions, and with the current state of the IPO market, there is a high demand for these transactions. He adds, “During almost every board meeting I attend, an employee is selling stock, and we have to approve or block the transaction if possible using our right of first refusal.”
He further states that Carta’s process is straightforward and ethical. “With Carta, they have a tender product where they coordinate directly with the company to facilitate the process. In the case of CartaX marketplace, we verify the buyer’s demand and confirm their legitimacy, then use public sources such as Crunchbase and Pitchbook to find potential sellers to match them with.”
Saarinen, however, has expressed concerns that Carta has been using information they have acquired as a service provider to contact investors and employees without the approval of the company. Saarinen states on LinkedIn, “Companies will most likely not approve these transactions. Most have restrictions and require approval from the board or majority shareholders. Carta mentions this in their FAQ section. They state, ‘Most secondary transactions will be subject to approval by companies.’ But they still accept buy orders and contact our investors, knowing these transactions will most likely not be approved.”
For Carta, the negative attention is just another setback in a string of bad publicity. The company has faced constant controversy, with Ward even emailing customers in October to address the negative press surrounding the company. Unfortunately, this only seemed to bring more attention to the reported issues plaguing Carta.
In January of 2023, Carta sued their former CTO, and the company has been involved in numerous lawsuits over the years. In 2020, the company was sued by their former VP of marketing, alleging gender discrimination and other violations. Shortly after, four employees spoke to The New York Times, stating that when they expressed concerns about the company’s operations, they were demoted, marginalized, or given pay cuts.
