By Paul Niblett —

The Carta Controversy

🔍 This Week in Venture News: Carta's Controversy and Lessons for Founders

🚀 The Issue:
Carta, a leading cap table software provider, recently faced a major crisis. It all began with a LinkedIn post by Karri Saarinen, CEO of Linear, revealing an unauthorized outreach by Carta Liquidity to an investor of Linear. This incident, involving what should have been confidential data, ignited a firestorm in the venture community.

💡 Carta's Dual Roles:
Carta is the category leader in cap table management. Helping over 40,000+ startups and investors manage equity online. They hold a wealth of data on funding rounds and valuations.

A separate org under the Carta umbrella, Carta Liquidity aims to provide market liquidity, allowing private market shareholders to sell shares before a company exits or IPOs. However, this dual role led to a potential conflict of interest and a perceived data integrity breach.

🌪️ Community Reaction:
The incident quickly went viral, attracting millions of views and 1000's of comments, underscoring the delicate nature of trust in the startup ecosystem.

🔍 Investigation & Outcome:
Carta's team, acknowledging the issue, found an internal policy violation by a staff member.

This incident posed a significant reputational risk for a company with over a decade of history and thousands of customers.

Responding swiftly, Carta's CEO penned articles and engaged directly with Karri Saarinen, eventually deciding to shut down the secondary trading business, prioritizing the core cap table business over the less lucrative secondary venture.

After all, why risk their $250 million/year capable business to grow their $3 million secondary business?

📝There are some great lessons here for founders:

  1. Data Integrity: Uphold strict data controls; customer data is a sacred trust. It's your customer's data - you're just the steward of it. Look out for unethical behavior and put systems in place to avoid it. The challenge is humans will find loopholes.
  2. Perception is Critical: If operating multiple organizations seems conflicting, that alone can deter customers. It's just a matter of time before the conflict of interest becomes a reality, as shown here. All it takes is 1 employee pushing the boundaries.
  3. Building and Maintaining Trust: Trust is earned in drops and lost in buckets. 10+ years of work damaged in days. Swift, decisive actions are vital for damage control.
  4. Navigating Product Market Fit: The startup journey can lead you away from your initial vision. It can be a hard pill to swallow. Carta started as eShares in 2012. Aiming to provide liquidity for founders, employees, and angel investors. To be the "Nasdaq of Private Markets." While their capable software took off - their liquidities side failed. Now, trying to grow their liquidities side has created this issue.
  5. The Challenges of Expansion: Becoming known for one core offering can make branching out into new areas challenging. Big companies struggle with intrapreneurship and disrupting themselves for many reasons - the startup and problem they're tackling cannibalizes their existing company - even if the new market is 10x bigger!

🔄 Aftermath and Industry Reflections:
We reached out to Competitors like Cake, who stated this has been a healthy shake-up in the industry and great for Cake.

This incident reflects the broader startup culture of rapid action, which can sometimes lead to unintended consequences.

Combined with the age of social media and heightened public scrutiny - everything you do could be on blast.

🤔 Your Thoughts?
As suggested by some founders, is this a systemic issue or a case of public overreaction in the age of social media and cancel culture? Could a more discreet approach have mitigated the fallout for Carta?

💬 Share your views on this unfolding story and its implications for the venture and startup world.

Possible LinkedIn comments:

Here are companies where you can trade secondaries safely:

<Tag them on LinkedIn>

We specifically tried to avoid rage-bait in this post, knowing that it's so easy to take advantage of this situation and blow things out of proportion. Forgetting the downstream consequences - 2000 employees work at Carta.

If speed and policy violations at a Cap table company warrant such attention - how much should the AI arms race that we're engaged in need? What ethical lines are being crossed behind the scenes? What is this going to cost us?