How to lose customer trust in 1 day

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Happy Wednesday, folks.

We’ve been heads down this week at Infobot. Super excited to share some of the things we’re getting ready to launch 👀

But for the sake of potentially organizing in-person events and finding first users for said new products, I need to know how many of you are out here:

No Christmas Cards for Carta

Carta rose to prominence in the world of startups with its cap table management platform, allowing founders to better organize the legal documentation of investors and evolve from the Excel sheets that looked like:

Since becoming the default for the “who owns what” of startups big and small, they’ve expanded into stock options, equity valuations, and compliance. Founder and CEO Henry Ward then set his eyes on an even bigger, more lucrative market: secondaries.

While not the first to look to better organize the fragmented market for secondary shares, Carta’s prospects were promising given their unrivaled access to cap table data.

Unfortunately, in its quest to build CartaX into the “Nasdaq for startups,” the company let its ambition get the best of it, allowing shady practices to manufacture liquidity. Employees, even those in non-sales roles, were able to access any companies’ cap tables.

This first came to light when this tweet went viral:

In this tweet, Linear founder Karri Saarinen posted a screenshot of a sales email to a Linear investor from a Carta employee in their Private Markets division with a direct offer for their shares from a third-party investor.

Even worse, the investor was an angel who hadn’t even disclosed his/her stake in the company, meaning the offer was only made possible by accessing the cap table.

The offer also quotes the share price from Linear’s Series B, implying that employees were even accessing and quoting the exact prices at which investors got in in their outreach efforts.

Needless to say, founders and investors aren’t thrilled, perceiving these policies as a breach of privacy, and competitors such as AngelList, Pulley, and Shoobx have experienced up to 7x spikes in traffic as founders look at replacements following the loss of trust.

To salvage credibility, the company announced that it was exiting the secondaries market, apologizing for the violations of trust and privacy.

What comes next remains to be seen.

Their core product remains strong, and the company’s own valuation hasn’t relied on predictions for CartaX. Still, there’s a reason they were so gung ho about this new vertical: growth is slowing.

This is damning for the prospects of a market for private shares.

There are massive discrepancies in the information disclosure which is required for public companies even beyond performance, and most founders don’t want sensitive cap table information to be public knowledge, knowledge which would be required for a market like this to operate efficiently.

This isn’t heartbreaking for founders as there already are options for those seeking liquidity.

More importantly, I have genuine concerns for what a consolidated secondary market might have on operations as founders are forced to deal with new investors, many of whom might not be the value-add partners that the founders had chosen in the first place. Startups would rather spend their mornings building new features than meeting with investors to inform them of their plans to maximize shareholder value.

If anyone was going to get secondary trading right, I think it was Carta. Their resorting to shady practices and the blow up since have me more bearish on the concept than I’ve ever been. That might not be such a bad thing, though 🤷

Carta's expansion into the secondary market with CartaX backfired due to privacy breaches and unethical practices, leading to a loss of trust among founders and investors and a boost for competitors. While Carta exited this market and retains a strong core product, the incident raises concerns about the viability of a secondary market for private shares.

Would love to connect on Twitter!

Cheers to another day,

Trey