I'm not at all clear that Carta did anything wrong (and I'm not sure what the latest in the story is to-date since it's being partially told in multiple venues and I don't use Twitter) and I'm not sure we'll ever know because I doubt either Linear or Carta want to lay all their cards on the table.
But, if *all* CartaX was doing is *connecting* potential buyers and sellers to facilitate a potential trade, and then the board would still ultimately have to bless the trade, so what? I don't know, however, if this is all they were doing. But I'm pretty sure most investor agreements prohibit direct 3rd party sales without a board blessing or option to buy the shares first (and yes, I'm sure most startups probably don't want to have to use their cash buy vested options or angel shares back at the current price).
I think the startup ecosystem is overwhelmingly skewed to favor founders and non-employee investors - and *maybe* that's ok since those groups have the most at risk. But I'm definitely in favor of an ecosystem where minor shareholders (i.e. employees with vested shares) can liquidate easily if there is a buyer. Right now stock options for employees - vested or not - are basically like holding lottery tickets. Most of the time they aren't ever going to be worth anything.
On the specifics on the story, I'm very much with you that connecting buyers and sellers seems fine? But it seems like Carta messed up in three ways:
- To your point, they pitched an offer to someone who couldn't or shouldn't sell on their own. Everyone seems to agree that was bad.
- They made it seem like the sales rep was prospecting for the deal? That feels like someone was just poking through Carta's cap table, and that seems bad? Like, everyone sorta knows that Carta employees probably can, in some special circumstances, see customer data. But you'd hope that, best case, it's very locked down and requires customer approval to do, and, worst case, people just don't look at it? But in this case, it seems like some sales rep basically wrote "SELECT * FROM investors WHERE company = 'Linear'" and was allowed to see the result.
- There's some ambiguity here, but it's also suspicious that the buy order was for the exact price of the series B. On one hand, that could be because the buyer said "I want to buy shares at the series B price," and the Carta rep inserted that number themselves in the email. But it raises some questions, like did the Carta rep tell the buyer what the series B price was? It's one thing to run a marketplace where you can submit bids, but the price is supposed to be private. Because Carta knows the price of what's being sold - and wants to do the deal - it makes it possible that Carta is helping the buyer negotiate the price to something the seller would want to take. And that's something that's very hard to prove you aren't doing.
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I do think the question about building a marketplace for *employees* is interesting though. I'm not sure how you'd do that, though it seems like it'd have to come from more of a derivative market than an equity exchange. There are lots of legal restrictions about buying and selling shares, but are there restrictions about selling derivatives on top of them? Like, could I, as an employee of a startup, create an independent contract with someone else where I sell the economics of my shares, but keep the shares themselves? Surely this has been tried?
On the sales rep prospecting point - if it wasn't a rouge rep doing something wrong (Carta's story I guess) - it's really hard to believe that prospecting shareholders wasn't covered in the agreement between customers and Carta. Like, it's really hard to believe they would be that blatant and dumb.
I had not read about the series B price bit. If indeed, Carta was disclosing non-public information about prior investing, that seems very bad.
It seems very hard to believe it was a rogue rep, given how many people said they got emails like that. Which is why it seems like Carta messed up, because if they lied about that, it makes it hard to believe anything they said.
And yeah, I'm sure it's technically allowed in their TOS. But terms can be pretty wide open for exactly this reason, where they're often written in a way to give companies as much legal cover as possible. (I think a lot of people (knowingly) misread terms this way, where they'll say things like "we share data with trusted persons" (ie, Google's terms) and people say, "That could be anyone! They want to share your data with anyone!" And yes, the point is that it could mean anyone, not because they want to share your data with anyone, but because they want to have cover if they get sued.) All of which is to say, yeah, if they went so far as to violate their own terms, that's bad.
I think Henry said that the buyer was an existing investor on the cap table and they were looking to size up - which would explain why they knew what price to offer price wise. It also adds to the "perfect storm of basically-impossible-to-prove-that-you're-not-doing-anything-wrong" stuff that ends up looking incredibly malicious to any third party viewer who won't bother to read that part.
Maybe? But that's the problem with saying it's one rep, which it doesn't seem at all like it was. If you are willing to be dishonest about that, why should we trust that it was an existing investor that was already on the cap table? Maybe it was, but I'm not sure why anyone would feel particularly obligated to believe that.
so as an empathetic exercise to the mob mentality I can empathize with that fear / pov from founders and spectators
but if I examine the situation more than an inch deep - there are two worlds.
1. where Henry is a bad faith actor, and deceptive, and is trying to cover his ass and say things he knows aren't true
2. where Henry is telling he truth and that's truly what his investigation over the weekend at that point in time was turning up and he believed it with utmost sincerity
It then feels incredibly obvious that if we were in world #1 - bad faith actors don't immediately respond "looking into it" as the CEO over the weekend and provide confrontational tirades in public w/o checking w/ PR and Legal. a bad faith actor would have done what all the spectators were saying he should do - spinelessly hide behind corporate PR & Legal to give some of non-answer, and then wait for the shitstorm to blow over of it's natural course
given that a bad faith actor would have so many other tools at their disposal - it then feels incredibly obvious that the only conclusion can be that he was sincere and honest in his communications
(i personally feel invested in this one, bc i try to communicate from the chest w/o reservations - and this feels like an incident where the mindless mob demonstrated that they prefer corperate double-speak to candor and ownership from a founder)
I think a practical different between Google and Carta is also that it’s 2024. I’m not so sure if Google was getting off the ground right now that some of Google’s behavior wouldn’t be perceived like Cartas. But we are used to Google and have used free gmail accounts for years - and we kind of know the price of free is the currency of our personal data. This being said when I start paying for something I very much expect privacy for my data - which could be another of Cartas problems.
Yeah, I think the paying thing is part of it, though I'm not sure it's quite "we pay for stuff" -> "we expect them to not use data like this." I'd guess that when you pay for a product, you assume the product is what you pay for. Like, I don't think people who pay for Youtube feel differently about Youtube using their data, or that people who don't pay for Slack would be like, "yup, sell my data, part of the deal." I'd guess that people see Youtube as being one type of product and Slack as another. And Carta's problem is that they tried to change midway through.
Ahh - ok. I if I’m getting a product free with no limitations - I assume the company is monetizing the product somehow. If it’s not free (and I could get it for free using a competitor) I often see (but not always true) privacy being a feature. Additionally I expect my financial and health data to be dealt with using more caution than my marketing preferences data. I agree Cartas problem was switch halfway through and just the nature of the market they are in - discretion is part of it.
Isn't the other difference between Carta and Google Search is that Carta is a paid product? When Google provides me helpful results for free, I assume that they're going to make money by selling me targeted advertising. When I use a paid service, I assume they're making enough money by my payments to them. This is especially true if I'm paying for a service for other people - a startup CEO doesn't want their investors to get targeted emails anymore than a parent wants their kids to get targeted ads for Bluey plushies based on the Disney+ subscription the parent pays for.
I think that's mostly true. I don't think it's the fact that people pay money versus get it for free though; I think it's that Carta build a business that people thought was cap tables, and paying for it helped confirmed that belief. Like, I don't think people who use, say, the free version of Slack would think, "sure, sell my messages, that's the deal with free software." They think of Slack as a chat app, not a marketplace that sells their data. Had Carta started with being an exchange on day one, I think people would've been more ok with it, even if they also had to pay the whole time. They might have been a little more reluctant to use it, but I don't think they would've seen the operation as unethical.
(Also, yeah, I fully agree about targeting the "ads" at other people being the real mistake Carta made here. Google's ad marketplace would blow up pretty quickly if they started sending ads about husbands search histories to their wives as ideas for gifts, or something.)
As usual, a thoughtful piece.
I'm not at all clear that Carta did anything wrong (and I'm not sure what the latest in the story is to-date since it's being partially told in multiple venues and I don't use Twitter) and I'm not sure we'll ever know because I doubt either Linear or Carta want to lay all their cards on the table.
But, if *all* CartaX was doing is *connecting* potential buyers and sellers to facilitate a potential trade, and then the board would still ultimately have to bless the trade, so what? I don't know, however, if this is all they were doing. But I'm pretty sure most investor agreements prohibit direct 3rd party sales without a board blessing or option to buy the shares first (and yes, I'm sure most startups probably don't want to have to use their cash buy vested options or angel shares back at the current price).
I think the startup ecosystem is overwhelmingly skewed to favor founders and non-employee investors - and *maybe* that's ok since those groups have the most at risk. But I'm definitely in favor of an ecosystem where minor shareholders (i.e. employees with vested shares) can liquidate easily if there is a buyer. Right now stock options for employees - vested or not - are basically like holding lottery tickets. Most of the time they aren't ever going to be worth anything.
On the specifics on the story, I'm very much with you that connecting buyers and sellers seems fine? But it seems like Carta messed up in three ways:
- To your point, they pitched an offer to someone who couldn't or shouldn't sell on their own. Everyone seems to agree that was bad.
- They made it seem like the sales rep was prospecting for the deal? That feels like someone was just poking through Carta's cap table, and that seems bad? Like, everyone sorta knows that Carta employees probably can, in some special circumstances, see customer data. But you'd hope that, best case, it's very locked down and requires customer approval to do, and, worst case, people just don't look at it? But in this case, it seems like some sales rep basically wrote "SELECT * FROM investors WHERE company = 'Linear'" and was allowed to see the result.
- There's some ambiguity here, but it's also suspicious that the buy order was for the exact price of the series B. On one hand, that could be because the buyer said "I want to buy shares at the series B price," and the Carta rep inserted that number themselves in the email. But it raises some questions, like did the Carta rep tell the buyer what the series B price was? It's one thing to run a marketplace where you can submit bids, but the price is supposed to be private. Because Carta knows the price of what's being sold - and wants to do the deal - it makes it possible that Carta is helping the buyer negotiate the price to something the seller would want to take. And that's something that's very hard to prove you aren't doing.
---
I do think the question about building a marketplace for *employees* is interesting though. I'm not sure how you'd do that, though it seems like it'd have to come from more of a derivative market than an equity exchange. There are lots of legal restrictions about buying and selling shares, but are there restrictions about selling derivatives on top of them? Like, could I, as an employee of a startup, create an independent contract with someone else where I sell the economics of my shares, but keep the shares themselves? Surely this has been tried?
On the sales rep prospecting point - if it wasn't a rouge rep doing something wrong (Carta's story I guess) - it's really hard to believe that prospecting shareholders wasn't covered in the agreement between customers and Carta. Like, it's really hard to believe they would be that blatant and dumb.
I had not read about the series B price bit. If indeed, Carta was disclosing non-public information about prior investing, that seems very bad.
It seems very hard to believe it was a rogue rep, given how many people said they got emails like that. Which is why it seems like Carta messed up, because if they lied about that, it makes it hard to believe anything they said.
And yeah, I'm sure it's technically allowed in their TOS. But terms can be pretty wide open for exactly this reason, where they're often written in a way to give companies as much legal cover as possible. (I think a lot of people (knowingly) misread terms this way, where they'll say things like "we share data with trusted persons" (ie, Google's terms) and people say, "That could be anyone! They want to share your data with anyone!" And yes, the point is that it could mean anyone, not because they want to share your data with anyone, but because they want to have cover if they get sued.) All of which is to say, yeah, if they went so far as to violate their own terms, that's bad.
I think Henry said that the buyer was an existing investor on the cap table and they were looking to size up - which would explain why they knew what price to offer price wise. It also adds to the "perfect storm of basically-impossible-to-prove-that-you're-not-doing-anything-wrong" stuff that ends up looking incredibly malicious to any third party viewer who won't bother to read that part.
Maybe? But that's the problem with saying it's one rep, which it doesn't seem at all like it was. If you are willing to be dishonest about that, why should we trust that it was an existing investor that was already on the cap table? Maybe it was, but I'm not sure why anyone would feel particularly obligated to believe that.
so as an empathetic exercise to the mob mentality I can empathize with that fear / pov from founders and spectators
but if I examine the situation more than an inch deep - there are two worlds.
1. where Henry is a bad faith actor, and deceptive, and is trying to cover his ass and say things he knows aren't true
2. where Henry is telling he truth and that's truly what his investigation over the weekend at that point in time was turning up and he believed it with utmost sincerity
It then feels incredibly obvious that if we were in world #1 - bad faith actors don't immediately respond "looking into it" as the CEO over the weekend and provide confrontational tirades in public w/o checking w/ PR and Legal. a bad faith actor would have done what all the spectators were saying he should do - spinelessly hide behind corporate PR & Legal to give some of non-answer, and then wait for the shitstorm to blow over of it's natural course
given that a bad faith actor would have so many other tools at their disposal - it then feels incredibly obvious that the only conclusion can be that he was sincere and honest in his communications
(i personally feel invested in this one, bc i try to communicate from the chest w/o reservations - and this feels like an incident where the mindless mob demonstrated that they prefer corperate double-speak to candor and ownership from a founder)
I think a practical different between Google and Carta is also that it’s 2024. I’m not so sure if Google was getting off the ground right now that some of Google’s behavior wouldn’t be perceived like Cartas. But we are used to Google and have used free gmail accounts for years - and we kind of know the price of free is the currency of our personal data. This being said when I start paying for something I very much expect privacy for my data - which could be another of Cartas problems.
Yeah, I think the paying thing is part of it, though I'm not sure it's quite "we pay for stuff" -> "we expect them to not use data like this." I'd guess that when you pay for a product, you assume the product is what you pay for. Like, I don't think people who pay for Youtube feel differently about Youtube using their data, or that people who don't pay for Slack would be like, "yup, sell my data, part of the deal." I'd guess that people see Youtube as being one type of product and Slack as another. And Carta's problem is that they tried to change midway through.
Ahh - ok. I if I’m getting a product free with no limitations - I assume the company is monetizing the product somehow. If it’s not free (and I could get it for free using a competitor) I often see (but not always true) privacy being a feature. Additionally I expect my financial and health data to be dealt with using more caution than my marketing preferences data. I agree Cartas problem was switch halfway through and just the nature of the market they are in - discretion is part of it.
Isn't the other difference between Carta and Google Search is that Carta is a paid product? When Google provides me helpful results for free, I assume that they're going to make money by selling me targeted advertising. When I use a paid service, I assume they're making enough money by my payments to them. This is especially true if I'm paying for a service for other people - a startup CEO doesn't want their investors to get targeted emails anymore than a parent wants their kids to get targeted ads for Bluey plushies based on the Disney+ subscription the parent pays for.
I think that's mostly true. I don't think it's the fact that people pay money versus get it for free though; I think it's that Carta build a business that people thought was cap tables, and paying for it helped confirmed that belief. Like, I don't think people who use, say, the free version of Slack would think, "sure, sell my messages, that's the deal with free software." They think of Slack as a chat app, not a marketplace that sells their data. Had Carta started with being an exchange on day one, I think people would've been more ok with it, even if they also had to pay the whole time. They might have been a little more reluctant to use it, but I don't think they would've seen the operation as unethical.
(Also, yeah, I fully agree about targeting the "ads" at other people being the real mistake Carta made here. Google's ad marketplace would blow up pretty quickly if they started sending ads about husbands search histories to their wives as ideas for gifts, or something.)