A leading provider of equity management services for privately held startups has been accused of using confidential customer information to boost its own business, sparking a wave of finger-pointing and recriminations within Silicon Valley’s startup community over the weekend.
At the center of the dispute is Carta, the equity management services startup last valued at $7.4 billion. On Friday, a Carta customer alleged on social media that Carta was using his company’s private information for self-dealing.
The customer, Karri Saarinen, cofounder and CEO of product development and management startup Linear, publicly shared an email received by one of his family members. In the email, a director at Carta Liquidity, a subsidiary focused on secondary market transactions, asks the family member about potentially selling their Linear shares to one of his clients.
The mystery, Saarinen said, was how the Carta employee was aware that this family member owned shares of Linear. The family member, Saarinen wrote on X, had never made their investment in Linear public and was “hardly online.”
“Somehow Carta was able to find their email address and the fact they own Linear shares,” Saarinen wrote, pointing out that Carta, as Linear’s cap table services provider, has information about the company, including who owns Linear shares and how much, the price at which they bought it and when, which transactions have taken place, and legal and compliance documentation. Saarinen’s social media posts suggested that Carta was using Linear’s confidential data without its approval to build out Carta’s own order book for its secondaries market platform.
In other words, Saarinen said he believed that the employee accessed confidential data about Linear’s shareholders in the hopes of brokering a deal, connecting an interested buyer of Linear shares on the secondary market with an existing Linear shareholder. (Carta discloses that Carta Liquidity charges a commission on these types of transactions—typically around 2% on each side—for its role in brokering secondary transactions.)
Saarinen published the tweet thread on X on Friday, and also on LinkedIn, and eventually shared a screenshot of another Carta outreach made to one of his investors in mid-December. He suggested this may not have been an isolated incident. On Sunday, Saarinen’s complaint on X had been viewed by over 1.7 million people and garnered thousands of reactions and a chorus of criticism from other startup founders on LinkedIn.
“I’m appalled that this happened,” Carta’s CEO, Henry Ward, wrote on Saturday on X, later acknowledging in a subsequent post that this had “impacted Karri’s company and two other companies.”
“We are still investigating but it appears that Friday morning an employee violated our internal procedures and went out of bounds reaching out to customers they shouldn’t have,” Ward wrote.
On Sunday afternoon, Ward expanded on this in a response he published on Medium, laying out Carta’s data privacy policies and the instances in which Carta is permitted to reach out to its startup customers’ shareholders. In the post, Ward said that, in the case of Linear and two other companies, Carta’s outreach was “absolutely a breach of our privacy protocols. And we have addressed it over the weekend.” Ward said that Carta was continuing to investigate the incidents “to make sure it never happens again” and also said he was rethinking whether Carta should be in the liquidity business at all.
“Perhaps just the appearance of being in the liquidity business makes us seem compromised. Everything we do must be grounded in trust and if being in the liquidity business compromises that trust, perhaps we need to reevaluate that offering,” Ward wrote.
The incident provoked an outcry among startup founders, many of whom said they also use Carta to manage their cap tables. While many startup founders organize liquidity events through processes such as tender offers, they are often wary of third-party secondary transactions, as founders lose control of which investors are scooping up shares and securing control within their company. Carta says on its website that some 40,000 companies use its platform—giving it far reach across the private ecosystem.
“They did something similar to us: reached out to our employees out of the blue for secondaries even if we don’t allow them,” wrote Clement Delangue, cofounder and CEO of AI collaboration platform Hugging Face, in response to the post on X. “They kept doing it even after we told them to stop. Big big damage on the trust!”
“They need to get consent from the company and/or define right of first refusal else startups can have control yanked out from under them,” Sarah McKenna, CEO at web data extraction startup Sequentum, responded on LinkedIn.
Saarinen did not respond to Fortune’s request for comment. Ward didn’t respond to a request for comment, and a Carta spokeswoman pointed Fortune to Ward’s blog post.
Ward and Saarinen continued to go back and forth on X this weekend, with the two reporting details of a phone call they had and Ward lodging a personal attack about the episode.
“It seems you are still planning to stay with us despite all of the public bashing? I don’t understand? Was this just to firebomb us for your personal twitter and LinkedIn exposure?” Ward wrote.
On Saturday evening, Saarinen said that he was “retiring” from his fight with Carta, had said everything he can, and that he was declining requests to speak with reporters.
Carta has been roiled in controversy over the past four years after several public scandals, including a series of lawsuits filed by former employees, alleging gender discrimination or harassment. At the end of last year, Carta conducted another round of layoffs, at least its third round of cuts in 2023.
Ward has previously pushed back against public criticism of Carta. Late last year, Ward published a letter on Medium in response to Fortune’s article about mounting litigation at the company. Ward later sent out a link to that letter to all Carta’s clients. That email also caused a stir on X, leading Ward to address it internally at the end of October during one of the company’s weekly town hall meetings.
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