Carta, the leading startup cap table management and valuation software platform, announced this week that it is shutting down its secondary market business following allegations that the company was trying to sell clients’ shares without their consent. The move represents a major strategic shift for Carta as it seeks to rebuild trust after the controversy threatens to upend its reputation.
Allegations Surface of Unauthorized Share Sales
The controversy began last week when Carta sent an email to one of its clients pitching a sale of some of the startup’s shares on the secondary market without the company’s knowledge or approval.
As reported by TechCrunch, “Carta appears to have gone ahead and tried to broker a sale of shares in one of its client startups without the entity itself actively participating in the sale.”
The client, an early-stage media measurement startup called TVPage, received the email from Carta inquiring about interest in selling some of its shares at a proposed $150 million valuation. This took TVPage founder Khalid Jones by surprise:
“I didn’t know what the email was talking about. Carta started marketing the sale of TVPage shares off of old data. We never approved them to do this.”
Carta CEO Henry Ward later admitted that “an email went out from someone on our team that should not have.” He pledged to investigate the allegations around improper use of confidential client information.
Carta Pauses Outbound Communications After Backlash
The reports of Carta’s unauthorized share dealing sparked significant backlash among its client base. Many founders and investors expressed concerns over breaches of trust and violations of privacy safeguards.
As noted by Fortune, within days of the allegations surfacing, “Carta paused its direct sales outreach, hiring, and employee travel to address the customer data issues.” Ward also informed Carta employees that the company would conduct a full investigation into the allegations.
This reaction suggests Carta recognized the urgency of addressing the brewing crisis over its business practices, including reassuring clients that their confidential data was not being misused or shared without permission. However, it remained unclear precisely what policies or controls allowed an email promoting unauthorized sale of client shares to be sent in the first place.
Exit From Secondary Sales Business “to Prioritize Trust and Transparency”
After a week of intensifying scrutiny and calls for accountability, Carta announced January 9th that it would wind down its secondary sale business. TechCrunch first reported Carta’s decision in an article aptly titled “After taking credibility hit, Carta announces it is exiting the secondaries business: ‘We have decided to prioritize trust’.”
In an internal memo to employees, Ward explained “we have decided to exit this line of business entirely.” He stated that offloading startup stock “can be distracting from our core purpose” and risks “erosion of trust.”
Instead, Carta will double down on its primary software products for cap table, valuation, and equity management services, where Ward believes Carta still maintains strong customer confidence. While he portrayed the strategic shift as consistent with Carta’s founding vision, industry experts viewed it as a clear acknowledgment that fallout from the unauthorized share dealing debacle necessitated a significant course correction.
Forecasting the Impact
Carta’s exit from the secondary market is certain to impact its growth plans as well as the startup funding ecosystem in Silicon Valley and beyond.
Carta likely anticipated strong demand and lucrative commissions from brokering secondary sales. Private company shares are increasingly viewed as valuable assets, often representing founders’ and employees’ most significant form of compensation. By eliminating this line of business, Carta loses an important revenue stream.
The company could also face lingering doubts around privacy and revisit questions about its dual role serving both investors and the startups they fund. While Ward has pledged transparency, only consistent reforms and improved controls may fully restore trust.
At the same time, fewer secondary market options could constrain liquidity for stakeholders at private technology firms. This market enjoyed huge growth amid the extended period for companies to reach IPOs or acquisition deals. If Carta’s exit presages more regulatory scrutiny over secondary sales, that could dampen volumes and discourage participation from groups like company insiders.
Overall, Carta must balance multiple competing interests as it charts its future course without secondary transactions. Rebuilding credibility is clearly its first order of business. But major challenges and strategic choices lie ahead. This unfolding story seems far from reaching its final chapter.
Tables and Figures
| Timeline of Key Events in Carta Controversy |
|-|
| December 2023 | Carta enters secondary market sales and equity liquidity services |
| January 7, 2024 | Email pitching unauthorized sale of client (TVPage) shares surfaces |
| January 8, 2024 | Carta pauses outbound communications amid backlash |
| January 9, 2024 | Carta announces exit from secondary sales business |
- Carta planned major expansion into secondary sales but exited after only 1 month
- Allegations over privacy violations and unauthorized dealing sparked intense criticism
- Exit aimed to “prioritize trust” but fallout may constrain future growth potential
- Carta’s latest $7.4B valuation came amid plans for financial services growth
- Controversy and strategic shift could jeopardize future valuation trajectory
- Rebuilding credibility now central to maintaining unicorn status
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