Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Carta, a $7.4bn software company used by start-ups to track their investors, is shutting down part of its business following allegations that it had tried to trade customers’ shares without their consent.
The company’s reputation has been battered by allegations that Carta staff used confidential information to solicit investors in start-ups to sell their stakes in the secondary market without consent from the start-ups themselves.
The secondary market for start-up stocks, one of the few routes for investors to access promising technology companies, has become increasingly competitive as public listings have stalled over the past 18 months.
Henry Ward, the company’s chief executive, said in a blog post on Monday night that the lacklustre performance and ultimate closure of the trading platform was “my greatest failure and disappointment”.
“Because we have the data, if we are trading secondaries, people will always worry that we are using the data, even if we are not. So we have decided to prioritise trust, and exit the secondary trading business,” he wrote.
Carta is at the heart of Silicon Valley’s start-up ecosystem and has tens of thousands of customers. Investors in the company — which include venture capital firm Andreessen Horowitz and private equity group Silver Lake — had once hoped that the private share trading platform would be a major source of revenue.
The crisis at Carta erupted over the weekend when Karri Saarinen, co-founder of software start-up Linear, alleged that Carta started “doing cold outreach to our angel investors about selling Linear shares to their buyer”.
Saarinen suggested that Carta could only have identified the angel investor through confidential information supplied by Linear to Carta’s primary business, a platform to help start-ups manage their investor base. That platform is meant to be walled off from Carta’s share trading business.
Ward blamed the incident on a rogue employee who used private data to contact investors in Linear and two other unnamed start-ups, and has pledged a full investigation into what happened.
A number of other investors claim to have received similar emails from Carta employees attempting to set up a trade in start-up stock. One angel investor was contacted by Carta in late 2022 about selling their stake in a start-up, according to emails shared with the Financial Times.
Carta did not respond when asked if an investigation into Saarinen’s claims would be expanded to include other investor allegations, but Ward has maintained that the company uses publicly available data to inform its outreach to investors.
One of Carta’s venture capitalist backers played down the significance of those messages. “People are trying to conclude that, because they got these emails, Carta was peeking at the cap table. A lot of it was just scrappy salespeople turning over the cards,” they said.
The company’s backers had hoped that trading stakes in start-ups could provide a big windfall for the company, one factor in Carta achieving a $7.4bn valuation in a 2021 funding round.
But three years on, Carta’s secondary trading business generates just $3mn in annual revenue, according to Ward. Carta had done “an abysmal job at the secondary business,” said Ward.
“We were very excited on the new business but that wound up not working out,” said one employee at a different venture firm that has backed Carta.
Read the full article here