Carta's long weekend hangover

Happy Monday. Here’s what we’ve got today…

• A look at Carta’s disastrous weekend

• The deal sheet, plus insight on Anthropic’s latest valuation

Carta, a fund and capitalization table management software provider, has come under criticism this weekend over allegations that it used customers’ confidential data without their consent as a means to gain a competitive edge for its secondary market platform.

Karri Saarinen, co-founder and CEO of issue tracking software provider Linear, said that one of his startup’s early investors notified him of an unsolicited Carta approach offering to purchase his Linear stake in a secondary transaction.

After checking with other Linear backers, Saarinen reported that Carta “is now doing cold outreach to our angel investors about selling Linear shares to their buyers.” He confirmed that Linear had neither given permission nor been notified by Carta and that no investors had consented.

Following the initial complaint, a series of other founders came forward with their own experiences. By Sunday evening, Saarinen reported that he had “heard from close to 10 companies who had this happen to them.”

Saarinen also noted that the Carta secondary purchase offer was at the exact price per share as Linear’s Series B. While the detail may have been obtained from other sources, Saarinen added that it made him “paranoid Carta is playing both sides here.”

A Combative Response

Carta reached out to Saarinen to request a one-on-one call with its CEO Henry Ward. Post-call, Saarinen publicly noted his position on the matter hadn’t changed, remarking that Ward had stopped short of promising a similar incident wouldn’t happen again in the future.

Ward then shot back a lengthy response:

The message sparked an immediate backlash, with numerous responses suggesting Ward delete the communication and one that predicted his reaction would “become the case study for why media and crisis management training is essential for Founders operating at scale.”

Separately, Ward released a blog post on Sunday night that called the incident “an internal policy violation” that had affected Linear along with two other unnamed companies.

In addition to announcing the company had launched an investigation into the matter, the note also outlined the company’s CartaX secondary market offering. Per Ward, if the platform “matches a trade in the marketplace,” Carta will use the company’s cap table to execute the trade if it receives permission from the company.

Ward’s response maintained “[Carta] does not and will never trade without company consent, and promised it’s not “compromising anyone’s data.”

Saarinen believes that’s inaccurate: “Not true. I have 7 Linear investors now confirming they were contacted with the same solicitation in the past months.”

Other founders corroborated Saarinen’s assertion that this was not a one-time breach of protocol. Reports noted similar instances of unauthorized solicitations dating back to as early as 2019, including a 2021 warning from Y Combinator’s Paul Graham that, “if you use Carta to manage your cap table, they will spam all your investors.”

Carta did not respond to a Transacted inquiry.

Mistakes Repeated

For Ward, this isn’t the first time public relations have proved problematic. Late last year, he responded to a separate crisis with what Axios’ Eleanor Hawkins labeled “a communications blunder so ghastly that you can't look away.”

In October, following allegations of gender discrimination and sexual misconduct, Ward opted to personally send an email to every one of Carta’s customers.

The opening paragraph included the line “you may or may not have been following some of the negative press about Carta,” which was followed by a link to a 1,900-word apology letter. In fact, very few recipients had been aware of any negative press, which the linked letter blamed for pushing a “sensationalized” narrative of events.

In the days immediately following the email, Hawkins noted a 1,550 percent spike in the number of news articles written about Carta and Ward.

Pressure to Execute

Carta has cemented itself as the market leader for cap table management, but may be running up against what is a relatively small market size in relation to the company’s $8.5 billion valuation.

That market is also becoming more competitive, with recent entrants Pulley and Angel List beginning to take share. Both platforms pounced on this weekend’s turmoil with promises of attractive pricing and easy onboarding for customers seeking alternatives to Carta.

Pressure is mounting for Carta to prove it can live up to those lofty expectations. That’s driven a heavy emphasis on expansion into adjacencies beyond its core cap table offering, including a fund administration product that’s seen early traction.

The real target, though, is the much larger secondary market served by the CartaX offering, in some ways a natural fit given Carta’s intimate private company customer relationships. However, the dynamics of secondary sales may cause unwanted friction with the company’s existing customer base.

Hari Raghavan, former COO of competing secondary platform Forge Global, explains:

Even if Carta agrees with the assessment, they may have limited alternatives. Last year’s sluggish venture environment caused further pain in the business’ core offerings—Carta underwent three separate rounds of layoffs in 2023.

Internal morale also appears to have taken a hit. In the aftermath of October’s harassment allegations, it was revealed that Carta had sued two former executives who publicly blew the whistle. In a related Fortune interview, an anonymous employee said CEO Ward “doesn’t really have control over anything.”

Near-term, Ward will have his hands full dealing with the fallout from this weekend’s events. Asked if he was going to terminate his company’s relationship with Carta, Linear’s Saarinen responded “pretty sure. We’ll evaluate the options next week.”

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• Summit Partners has ceased new private credit origination after its latest fundraising fell short of expectations.

1. A bigger valuation isn’t always better.

• Semafor’s Reed Albergotti explains the thought process behind Anthropic’s latest raise. — Why hot AI startup Anthropic wanted a lower valuation, Semafor

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