Carta, a VC-world institution, is cut down to size after allegations of ethics violations

Update Tuesday, January 9:

Late Monday night, Ward published a new Medium post saying he hadn’t needed “months” to think things through, after all. Carta would simply leave the startup stock trading market, he wrote: “We will exit the secondary trading business to eliminate any concern that we are not acting in our founders’ best interests. . . . There are many many talented people working on the private market liquidity problem. We will enthusiastically cheer for them from the sidelines.”

Saarinen applauded the “bold move” right afterward on X, for recognizing the conflict of interest between those two business units and acting quickly to fix it. He added, “The only I thing really asked as a founder: keep the data private unless I opt in.”

Original story:

Carta, a fintech startup that rode its message of democratizing startup ownership to a $7.4 billion valuation, is facing mounting blowback after a client accused one of the company’s sales employees of trying to use confidential customer information to broker trades.

Carta has been celebrated by Fast Company and others for giving startup employees the tools to reap the benefits when their companies go public. It primarily makes software used by many early-stage ventures to track ownership.

On Friday, the CEO of one such institution—Karri Saarinen of the software startup, Linear—posted on LinkedIn that Carta had tried to use Linear’s private capitalization-table data to facilitate the sale of Linear shares. “As a founder, it feels kinda shitty that Carta, who I trust to manage our cap table, is now doing cold outreach to our angel investors about selling Linear shares to their non-disclosed buyers,” he wrote, then closed with a warning shot: “This might be the end of Carta as the trusted platform for startups.”

Saarinen shared an email forwarded by a family member—who, according to him, is “hardly online” and had never publicly disclosed they owned any Linear shares—that they’d received from a director at Carta Liquidity, a subsidiary that helps company shareholders sell stock to investors on the secondary market. The email told this family member that a buyer wanted to purchase their Linear shares. Saarinen was furious because Linear hadn’t been asked to approve this sale, suggesting that somebody (or somebodies) on Carta Liquidity’s team had committed an ethical breach by trying to capitalize off clients’ confidential data.

Shortly after Saarinen’s post appeared, Carta CEO Henry Ward blamed a rogue employee for the incident. “We are still investigating,” he wrote on X, “but it appears that Friday morning an employee violated our internal procedures and went out of bounds reaching out to customers they shouldn’t have.” He added: “I’m appalled that this happened.”

Ward ultimately published a long Medium post attempting to rebut additional accusations shared by other startup founders that followed Saarinen’s this weekend. Ward implied the incident affected only Linear and two more Carta clients. Insiders tell the media the individual responsible has been placed on leave. A spokesperson for Carta didn’t respond directly to Fast Company‘s questions, but instead referred us to Ward’s Medium post.

That post explained Carta’s data-privacy policies, and vowed: “After 10 years of managing cap tables across 40,000 startups, I promise we aren’t compromising anyone’s data.”

Meanwhile, Saarinen spent the weekend sharing growing suspicions that this lapse was less of an isolated incident than Ward suggested. He noted a separate outreach that Carta had made several weeks prior, to a different investor. On Sunday night, he noted seven Linear investors had confirmed that they’d been “contacted with the same solicitation in the past months” by Carta. Beyond that, he said “close to 10 companies” had reached out saying they’d suffered the same sort of ethical breach.

Others chimed in publicly on social media. “They did something similar to us: reached out to our employees out of the blue for secondaries even if we don’t allow them,” tweeted Clement Delangue, cofounder and CEO of Hugging Face, an AI-collaboration platform. “They kept doing it even after we told them to stop.”

Ward and Saarinen traded increasingly pointed barbs over the weekend, with Ward lashing out at one point on X: “It seems you are still planning to stay with us despite all of the public bashing? I don’t understand? Was this just to firebomb us for your personal Twitter and LinkedIn exposure?”

Regardless, Ward is unambiguous about the Linear incident being “absolutely a breach of our privacy protocols,” serious enough to even cause him to question Carta’s business priorities. “Perhaps just the appearance of being in the liquidity business makes us seem compromised” and maybe “we need to reevaluate that offering,” he wrote on Medium. “I will think about this and come back with more thoughts in the coming months.”

Some members of the startup community argued they’d seen this one coming. Hari Raghavan, an adviser for AngelList—a Carta competitor—tweeted on Sunday evening that “this conflict of interest was inevitable, and has been brewing for years.”

Carta’s core business is selling Silicon Valley’s top capitalization-table management software—a product tracking who owns how much of a company, the value of each investment round, dilutions after changes in ownership structure, etc. But according to Raghavan, this financial product is more niche than banking, credit cards, or payroll. The entire market does maybe $500 million to $1 billion of annual sales. Yet, Carta’s last valuation was nearly $8 billion.

“Greater than the value of the entire market they operate in,” Raghavan wrote. He goes on to make the assumption, which has not been confirmed, but appears to be shared by much of the Silicon Valley crowd, that Carta’s breach was not, in fact, an isolated incident. According to him, that “the only way for Carta to grow into the valuation . . . is by moving into adjacencies,” perhaps in ways that make a person “think Carta is being reckless by endangering existing customer relationships to bet on a new product line.”

Everyone “is correct in pointing out the conflicts of interest,” Raghavan claimed, but “Carta has to make some unreasonably aggressive moves to succeed in the secondaries space . . . and it might be a bet-the-company move for them.”