Carta Destroys Trust and Enterprise Value
Strategies and Techniques for Change Agents, Strategists, and Innovators
“Trust is like the air we breathe – when it’s present, nobody really notices; when it’s absent, everybody notices.” Warren Buffett
Our first leadership lesson of 2024 is offered by Carta, a Silicon Valley SaaS tech darling.
Is this another lack of corporate controls? A cyber-security data breach compromising customer information? Some other type of salacious impropriety? Nope.
This is a case of a company being entrepreneurial and building what one might call a “synergistic business offering” on top of their great existing business. Part of a flywheel strategy. In doing so, they did not define or operationalize the expectations and behavior for protecting one of their corporate jewels — trust.
Background
Carta is the market leader in capital table (or “cap table”) management solutions. This solution involves keeping track of a company's equity ownership, stock options, and market valuation. This service is particularly valuable for startups and private companies who need to manage their equity distribution among founders, employees, and investors accurately and efficiently. Carta's platform offers a streamlined way to handle complex equity management tasks, simplifying the processes of issuing stock, managing equity plans, and providing accurate, up-to-date equity information.
Carta's secondary market business and solution is known as "CartaX." CartaX aimed to create a marketplace for trading private company shares. This platform allows shareholders in private companies, particularly employees with stock options, to sell their shares to accredited investors. CartaX represented a significant step for Carta, leveraging its robust database from its cap table management services to facilitate these private share transactions. The platform was designed to provide liquidity in the private market, offering a structured and secure environment for private stock transactions, which traditionally lacked the same level of accessibility and transparency as public markets. Carta's secondary market trading business, CartaX, was a part of its broader range of fintech services.
And That’s Where the Story Starts
Carta's role is unique because it started as a company specializing in managing cap tables for startups. By managing this privileged information of the cap tables, Carta had detailed information on who owned shares in these startups. The secondary market trading business of Carta involves using this data to facilitate the buying and selling of these private shares. In essence, it acted as a marketplace for private stock transactions, leveraging its extensive network of companies and investors.
However, this business model raised concerns about conflicts of interest and privacy, as Carta has access to sensitive data through its cap table management services. When it was alleged that Carta used this data to initiate secondary market transactions without proper consent, it highlighted the potential for misuse of sensitive information.
This controversy led to Carta's quick decision to exit the secondary market trading business, as it sought to prioritize customer trust and data privacy over the expansion of its services in this domain.
According to the WSJ,
Carta’s struggles began last Friday (when Karri Saarinen, the chief executive of software startup Linear, posted on LinkedIn that Carta was using information about his company’s investor base to attempt to sell its shares to external buyers without the company’s knowledge or consent, which would violate Carta’s agreement with customers.
The post kicked off concerns about whether Carta had improperly accessed confidential company data through its primary business of managing startups’ cap-table information—and whether it was a systemic problem at Carta or the actions of a single employee.
Carta co-founder and CEO Henry Ward wrote on X that he blamed the incident on an employee who “violated our internal procedures and went out of bounds reaching out to customers they shouldn’t have.”
On Monday, Ward wrote a Medium post saying that Carta was exiting the secondary trading business to shore up the trust of its customers. “Because we have the data, if we are trading secondaries, people will always worry that we are using the data, even if we are not,” Ward wrote. “So we have decided to prioritize trust, and exit the secondary trading business.”1
The Fallout
In the short-term, not only will clients of Carta evaluate other options, and there are plenty, but significant brand and reputation value has been destroyed. Carta has ended the CartaX services. Difficult to know what the long-term business impact is for the core cap management solution will be.
But here’s my guess. Carta will have to retreat from other future business models built off the privileged information they have about their customers. This likely significantly decreases their total addressable market (TAM) for their enterprise in a material manner. Certain parts of the “flywheel” for Carta have met an abrupt end.
It could have all been avoided if they had focused on one concept and question:
What is “trust” and how do I design a business which builds trust versus erodes trust?
What is “Trust”
There are a number of important words and terms which are bantered around like they are obvious and critical, but rarely does someone slow down and try to build an actionable definition for it. An example is the term “leadership”. Everyone thinks they know what “leadership” is, but rarely do we pause and consider what leadership is for a particular situation, how to build it, how to measure it, and how to be systematic about it. The word “trust” is like this.
Websters defines “trust” as “assured reliance on the character, ability, strength, or truth of someone or something”2
A more helpful definition is for “trustworthy”. Websters defines “trustworthy” as simply “dependable”.
Building on the concept of "dependability," I propose that in the majority of business interactions, "trust" is exemplified by the ability to consistently make and fulfill commitments. To be dependable.
To operationalize “trust” you must set expectations and then manage to these commitments.
The first step of being trustworthy is to define and communicate expectations with your team, client, partner or colleague. Outline your promises, expectations, limitations, assumptions, SLAs (service level agreements), and what they can count on from you. Often, this includes outlining what is required from the other party.
This sets the anchor point called “expectations”.
The second step is keeping the commitment. When commitments are clearly defined, we can now measure, audit, debate and evaluate how we are doing against our set expectations. In this way, “trust” goes from a vague notion, to an explicit and managed aspect of the business and culture.
In most scenarios of broken trust is that the actor is not deliberate in figuring out what the expectations of trust are, thus they cannot consistently evaluate situations and ask “is what I’m proposing to do trustworthy”?
As the saying goes, if you can’t measure it, you can’t manage it. Setting concrete definitions of expectations of allows for measurement, evaluation and consistent high-judgement deliberations.
True Accountability
The CEO of Carta, Henry Ward stated on X that “he blamed the incident on an employee who “violated our internal procedures and went out of bounds reaching out to customers they shouldn’t have.”3
That might be true. But what is also likely true (this is a conjecture on my part) is that the company did not create clear definitions and examples of trustworthy behavior given the privileged information and position Carta has. They did not set expectations. Thus in either training or communications, the employee did not see the issue.
Company executive leadership and the board are accountable for this. The employee was likely given the direction to get deals done, and without clear guardrails, they did what many of us might do.
Your Homework
Answer these three questions:
What does “trust” mean in your business?
Do you set appropriate expectations?
Do you communicate, measure and operationalize these commitments?
The answers to these questions will help you build a brand with “trust” as a cornerstone, and avoid eroding it either slowly over time, or dramatically as Carta has done.
Last Call
I have a limited number of pre-release copies of Big Bet Leadership: Your Transformation Playbook for Winning in the Hyper-Digital Era. Our publisher, Rodin Books, created a beautiful book.
If you’d like a signed copy of Big Bet Leadership before you can buy one, either
upgraded to a paid version of The Digital Leader Newsletter
Or send me an idea, a connection, an invitation to put the book to work. The book releases on 2.27.24.
Examples ideas could include:
A connection to a key business influencer or senior executive who would enjoy the book (I’ll send a copy to both of you)
An invitation to conduct a “book club” with your executive team. I’ve done dozens of these with my other books and they are impactful conversations.
Any other actionable idea.
Read more about Big Bet Leadership HERE.
Onward!
John
About The Digital Leader Newsletter
This is a newsletter for change agents, strategists, and innovators. The Digital Leader Newsletter is a weekly coaching session focusing on customer-centricity, innovation, and strategy. We deliver practical theory, examples, tools, and techniques to help you build better strategies, better plans, and better solutions — but most of all, to think and communicate better.
John Rossman is a keynote speaker and advisor on leadership and innovation.
Learn more at
https://johnrossman.com
https://www.wsj.com/articles/carta-a-key-silicon-valley-player-for-startups-stumbles-prompting-customers-to-consider-competitors-89800bb8
https://www.merriam-webster.com/dictionary/trust
https://www.wsj.com/articles/carta-a-key-silicon-valley-player-for-startups-stumbles-prompting-customers-to-consider-competitors-89800bb8