> Buy price was exactly our series b share price. The angel investor in this case was a family member whose investment was never published and hardly online. Yet he was contacted directly to the email he used with Carta
As said before, it is not impossible that the buy price was determined using public information. However, he is definitely implying it would be impossible to know the identity of this investor if it wasn't for Carta sharing private information with Carta Liquidity.
This is so awful. Carta is the Facebook of B2B software (i.e., hoover up user data then find lots of ways your users don’t expect to monetize it). Their business model has always been premised on a bait-and-switch. It’s how they’ve justified their crazy high valuations (e.g., “Imagine it we could create the largest market for private securities!! We’ll be rich!!!”). Otherwise, the market for cap table management just isn’t that big.
As a founder you should maintain tight control of who is on your cap table. Carta disagrees. That may be good for them but is terrible for startups. If you’re using Carta, call your support rep and insist they never market, offer, or induce any buyers or sellers of your stock without your explicit permission. If they refuse, change vendors.
Upvoted this because this comment is from the CEO & co-founder of CloudFare - a public company. He clearly knows about liquidity going from private to public.
Agree on the need for founders to guard their cap table, especially against strategic moves by competitors.
Regarding better liquidity for employees, it's great that companies are exploring options. Carta is in a unique position to lead this. But it's key that both the company and investors opt-in (not buried in a ToS).
What's wrong about folks selling shares they own? Maybe it's bad for the founders, but there's always a good chance these employees may not see a real liquidity event.
What's the alternative? Solium with their Shareworks service, now under Morgan Stanley, did much of the same thing. You think Morgan Stanley isn't making informed bets off that data?
I could agree that Carta may be doing it to an extreme but it's far from unprecedented.
I guess we'll see what Carta has to say for themselves, but seems like it could be a continuation of the lack of organizational discipline they've demonstrated in recent times. This is a really bad look, and given Carta's inability to add significantly more value beyond basic cap table and employee equity management, I wonder if the days are numbered before other companies supplant them, such as Pulley.
I've spent quite a bit of time on HN frontpage, and I feel like the trajectory this post is taking in the feed order is weird, it should be near the top, as it was a while ago.
Right now it's ranked 27, and there are many posts ranked higher than this that have fewer upvotes, fewer comments, and were posted before this point (assuming being recent, having high upvotes, and number of comments are used in ranking on the frontpage).
I work for a startup and I don't even understand half the comments in this thread
I'd be very greatful for a few hours of content I can listen to or read that would explain what's at play.
If your remuneration includes shares or options in the startup, you owe it to yourself to understand how startup shareholding works - I'm not being dismissive here - you could save yourself from making poor financial decisions. High level topics: Cap table, funding rounds, dilution, shares vs options (and the tax implications of exercising options), liquidity events & secondary markets. I may be missing more.
Don't feel bad. The issue here is the relationship with the company & Carta and overall corporate concerns, not much about employee equity.
Briefly:
- In a startup you're granted options. Contract that allows you to buy certain amount of company shares at a specific price (”strike price”, also known as “exercise price”), which is usually the fair market price at the time when your options are granted. Options do not give you ownership of stock, instead they provide you rights to purchase stock at a favorable price.
- Fair market price is the price of the stock based on the company’s current valuation (set by an outside evaluator). Early stage companies the fair market valuation 20-30% of the valuation investors pay.
- Exercising your options means purchasing all or some of your shares and becoming a shareholder in the company. For example, if your strike price is $1.50 and you exercise your option for 1,000 shares, your exercise will cost $1,500 (1,000 x $1.50) plus any potential taxes, and you will be a holder of 1,000 shares. Now if in the future the company IPOs with a stock price of $100 you can sell those shares and get $100k or gain $98.5 per share.
- Exercise window is the time you can buy your options. Commonly in US startups required you to purchase the shares within 90 days of you leaving the company or you lose it. More employee friendly startups have extended exercise windows that let you keep the options for 7 or 10 years.
- Early exercise. Employee friendly startups allow early exercise for your options to avoid paying taxes along the way. Say you join the company when the strike price is $1.50. You exercise the shares at $1.50 now you own the shares and since there was no gain, you don't have to pay taxes at that time. If you don't early exercise then, but wait until the next funding round when the strike price is now $4.50, your now have to pay tax on the gain of $3. In both cases in the end if you one day sell the stock for $100 you still pay the same amount of taxes (gain from $1.50 to $100 or from $1.5 to $4.5 + $4.5 to $100). It just lets you to avoid taxes until you have actual liquidity and also lets you to pay long term gains, sometimes get it even tax free if your company and holding is QSBS eligible.
I'm OP on the tweet. To clarify on some points why I think this is wrong:
Private companies generally don't want or allow secondary transactions. Every good company wants to manage their cap table and who is on it. Every shareholder has some level of rights and sometimes you need their signatures on things. A problematic shareholder can cause a lot of problems that are time consuming to the company. Companies do offer secondary sales to employees and existing investors at times but those cases the buyers are vetted by the company. If anyone would want to sell the shares, I'm quite sure we would find buyers from the existing shareholders.
So secondary sales to unknown buyers is potentially harmful for the company. Carta's whole business has been to help private companies to manage their equity. Using their own employees to start soliciting these secondary sales is actively trying to harm the startup who is their customer.
Carta also sits on this trove of confidential information about the company, the cap table, pricing, transactions etc. As a founder or company you trust them to manage this information and keep it confidential. Now it seems they are using this information to trying to build their order book on their secondary sales marketplace. They reached out to someone (a family member, whose investment is not public, who is not in tech/didn't opt in to this in any way). I believe only Carta knows is an investor in the company. The price the buyer was willing to buy was exactly our Series B price.
The concern becomes what level of confidential information are exactly exposing here, who has access and how it's used. In this case it seems that this person had access to our cap table in order to reach out the investor and buyer somehow was able to set their price exactly as our Series B price.
I'm perfectly fine with the idea if Carta has secondary sales platform for a company approved tender offer or secondary sales. Even could be ok if buyers could submit their interest and Carta could inform the company about the interest.
Where I think it crosses the line where Carta uses their employees to solicit these sales and (I believe) use private cap table information to reach out to the stakeholders to get them to sell knowing company or board hasn't approved any secondary sales and doesn't want to.
Carta who is expert in startup equity, should know that most startups don't want to see random secondary sales happening and usually they are not allowed. I know 3rd party platforms exists for this and you can go around the restrictions with forward contracts.
To me it feels unethical practice from a vendor trying to actively harm us and using confidential information to do so.
PS: Carta did reach out to me to schedule a call but didn't provide any details yet.
Update: I polled our investors and so far 3 people have said they got the same email. All of them were the earliest investors with most gains. Again feeling that Carta had more information on who to targets
Thanks. Looks like some eager sales person. Info on price is available on multiple platforms. In fact some of your investors could be buyers.
I am a Carta user and my investors did not get any if these emails (I checked). My customer success person at said carta markets new products/service so maybe just opt out of emails/do not contact.
Can you elaborate on your update tweet? I can’t believe that Carta is gaslighting you and victim blaming instead of saying they won’t do it again. Somewhat troubling that they say an employee potentially self-approved a “break-glass” procedure and in response, they’re “looking into it.”
I’m having some trouble conceptualizing the notion where there’s a secondary market buyer of private company who’s obliged to transact at a given price, but might go higher.
Is the idea that a secondary market buyer struck a deal with Carta’s capital markets division that if Carta can locate shares of XYZ startup, then the buyer agrees to buy those shares at $x, but may pay the investor more if (for example) a higher price is a condition of the board’s approval of the transfer?
It depends on the shareholder agreement, but many do. However, many of these secondary markets facilitate private market transactions via a forward contract which is sort of like long dated put option.
This is generally the case for common stock but not preferred shares (such as you'd get from being an angel), though it obviously depends company to company.
I would read the Terms of Service.
What’s wrong with someone getting liquidity? VC sell their stakes to other VCs all the time why shouldn’t other investors or even tenured employees.
Liqudity programs like tender offers are price controlled not market controlled and companies are first to tout their RSU values in compensation packages esp when they are overvalued
Probably just another clueless "customer success" manager who doesn't know what company they're working for, or who their customers are, or what day of the week it is. Just drooling on the keyboard while aimlessly clicking in Salesforce and copy pasting emails in between meetings.
Yes I believe so. Founders will claim your interest is aligned with theirs to keep the cap table clean, but in my experience you can't determine the true market clearing price for your owned shares without marketing them outside the current set of investors.
Founders may not like it but it's kind of on the startup scene's current proclivity for keeping companies private for much longer than in the past and therefore restricting employee and investor liquidity. These services are responding to a market need. Carta may have broken their agreement with the startup but it is, in my opinion, generally a good thing to allow more price discovery for all investors.
Companies typically use Carta to manage their cap table, shares, and overall ownership of the company.
This requires a high level of trust as there is a lot of financial information at stake.
Carta seems to be taking this confidential information and is potentially sharing it with other investors and soliciting investors to sell their shares.
Imagine you are planning a wedding and you use party.com as an easy way to manage the guest list. Maybe you give your friend two seats — him and a plus one — the Smith family four seats, and your diving club pals a whole table. Also, you’ve invited surprise guest auntie Beyoncé.
These are all people with whom you have entrusted important rights such as dressing nicely, staying relatively sober, and not poking the cake. Additionally, the wedding venue has a fire safety limit of 150 people. Any more than this and the authorities shut you down for abusing the privileges they give to small weddings.
Well now imagine that party.com has been emailing your neighbours and mortal enemies the Joneses saying the Smiths have two seats they want to sell and that Beyoncé is going to be there. They also help the diving sell half their table to what turn out to be classical music supremacists who show up protesting Beyoncé’s pop music. One of them also gets drunk and pokes the cake. Thanks a bunch party.com.
In real life, shareholders can do unhelpful things or act with downright hostility so you need people you know and who you trust to behave themselves.
The SEC also give you an exemption from having to register with them (and publish your accounts) but only if you have fewer than 500 shareholders. If a big shareholder splits their holding and sells to a bunch of random people then they risk pushing you over that limit.
Carta / party.com are abusing their position by marketing your shares / wedding invitations behind your back.
Why does Carta have Linear CAP table? I mean what service they're offering that it's worth for startups to have this info managed by other party? CAP table sounds like sth that could be stored in a spreadheet.
[+] [-] gurchik|2 years ago|reply
> Buy price was exactly our series b share price. The angel investor in this case was a family member whose investment was never published and hardly online. Yet he was contacted directly to the email he used with Carta
As said before, it is not impossible that the buy price was determined using public information. However, he is definitely implying it would be impossible to know the identity of this investor if it wasn't for Carta sharing private information with Carta Liquidity.
[+] [-] zerothOffset|2 years ago|reply
[+] [-] eastdakota|2 years ago|reply
As a founder you should maintain tight control of who is on your cap table. Carta disagrees. That may be good for them but is terrible for startups. If you’re using Carta, call your support rep and insist they never market, offer, or induce any buyers or sellers of your stock without your explicit permission. If they refuse, change vendors.
[+] [-] patrickhogan1|2 years ago|reply
Agree on the need for founders to guard their cap table, especially against strategic moves by competitors.
Regarding better liquidity for employees, it's great that companies are exploring options. Carta is in a unique position to lead this. But it's key that both the company and investors opt-in (not buried in a ToS).
[+] [-] candiddevmike|2 years ago|reply
[+] [-] xyzzy_plugh|2 years ago|reply
I could agree that Carta may be doing it to an extreme but it's far from unprecedented.
[+] [-] acjohnson55|2 years ago|reply
[+] [-] alsodumb|2 years ago|reply
[+] [-] alsodumb|2 years ago|reply
Right now it's ranked 27, and there are many posts ranked higher than this that have fewer upvotes, fewer comments, and were posted before this point (assuming being recent, having high upvotes, and number of comments are used in ranking on the frontpage).
[+] [-] notamy|2 years ago|reply
[+] [-] adaboese|2 years ago|reply
[+] [-] threeseed|2 years ago|reply
https://sfstandard.com/2023/10/25/carta-san-francisco-lawsui...
[+] [-] k8svet|2 years ago|reply
I feel so miserably ignorant and lost. :/
[+] [-] sangnoir|2 years ago|reply
[+] [-] nezaj|2 years ago|reply
You may find this one especially helpful https://youtu.be/Dk6JNTDec9I?si=8fzjDJS8XoxB3vLG
[+] [-] enra|2 years ago|reply
Briefly:
- In a startup you're granted options. Contract that allows you to buy certain amount of company shares at a specific price (”strike price”, also known as “exercise price”), which is usually the fair market price at the time when your options are granted. Options do not give you ownership of stock, instead they provide you rights to purchase stock at a favorable price.
- Fair market price is the price of the stock based on the company’s current valuation (set by an outside evaluator). Early stage companies the fair market valuation 20-30% of the valuation investors pay.
- Exercising your options means purchasing all or some of your shares and becoming a shareholder in the company. For example, if your strike price is $1.50 and you exercise your option for 1,000 shares, your exercise will cost $1,500 (1,000 x $1.50) plus any potential taxes, and you will be a holder of 1,000 shares. Now if in the future the company IPOs with a stock price of $100 you can sell those shares and get $100k or gain $98.5 per share.
- Exercise window is the time you can buy your options. Commonly in US startups required you to purchase the shares within 90 days of you leaving the company or you lose it. More employee friendly startups have extended exercise windows that let you keep the options for 7 or 10 years.
- Early exercise. Employee friendly startups allow early exercise for your options to avoid paying taxes along the way. Say you join the company when the strike price is $1.50. You exercise the shares at $1.50 now you own the shares and since there was no gain, you don't have to pay taxes at that time. If you don't early exercise then, but wait until the next funding round when the strike price is now $4.50, your now have to pay tax on the gain of $3. In both cases in the end if you one day sell the stock for $100 you still pay the same amount of taxes (gain from $1.50 to $100 or from $1.5 to $4.5 + $4.5 to $100). It just lets you to avoid taxes until you have actual liquidity and also lets you to pay long term gains, sometimes get it even tax free if your company and holding is QSBS eligible.
Some guides that we share with our employees:
https://medium.com/swlh/understanding-startup-stock-options-...
https://www.holloway.com/g/equity-compensation
https://blog.alexmaccaw.com/an-engineers-guide-to-stock-opti...
https://www.wealthfront.com/blog/equity-ipo-guide
[+] [-] enra|2 years ago|reply
Private companies generally don't want or allow secondary transactions. Every good company wants to manage their cap table and who is on it. Every shareholder has some level of rights and sometimes you need their signatures on things. A problematic shareholder can cause a lot of problems that are time consuming to the company. Companies do offer secondary sales to employees and existing investors at times but those cases the buyers are vetted by the company. If anyone would want to sell the shares, I'm quite sure we would find buyers from the existing shareholders.
So secondary sales to unknown buyers is potentially harmful for the company. Carta's whole business has been to help private companies to manage their equity. Using their own employees to start soliciting these secondary sales is actively trying to harm the startup who is their customer.
Carta also sits on this trove of confidential information about the company, the cap table, pricing, transactions etc. As a founder or company you trust them to manage this information and keep it confidential. Now it seems they are using this information to trying to build their order book on their secondary sales marketplace. They reached out to someone (a family member, whose investment is not public, who is not in tech/didn't opt in to this in any way). I believe only Carta knows is an investor in the company. The price the buyer was willing to buy was exactly our Series B price.
The concern becomes what level of confidential information are exactly exposing here, who has access and how it's used. In this case it seems that this person had access to our cap table in order to reach out the investor and buyer somehow was able to set their price exactly as our Series B price.
I'm perfectly fine with the idea if Carta has secondary sales platform for a company approved tender offer or secondary sales. Even could be ok if buyers could submit their interest and Carta could inform the company about the interest.
Where I think it crosses the line where Carta uses their employees to solicit these sales and (I believe) use private cap table information to reach out to the stakeholders to get them to sell knowing company or board hasn't approved any secondary sales and doesn't want to.
Carta who is expert in startup equity, should know that most startups don't want to see random secondary sales happening and usually they are not allowed. I know 3rd party platforms exists for this and you can go around the restrictions with forward contracts.
To me it feels unethical practice from a vendor trying to actively harm us and using confidential information to do so.
PS: Carta did reach out to me to schedule a call but didn't provide any details yet.
Update: I polled our investors and so far 3 people have said they got the same email. All of them were the earliest investors with most gains. Again feeling that Carta had more information on who to targets
[+] [-] zerothOffset|2 years ago|reply
I am a Carta user and my investors did not get any if these emails (I checked). My customer success person at said carta markets new products/service so maybe just opt out of emails/do not contact.
[+] [-] aspenmayer|2 years ago|reply
https://twitter.com/karrisaarinen/status/1743824345334714587
[+] [-] nocoiner|2 years ago|reply
[+] [-] eastdakota|2 years ago|reply
[+] [-] unknown|2 years ago|reply
[deleted]
[+] [-] nocoiner|2 years ago|reply
Is the idea that a secondary market buyer struck a deal with Carta’s capital markets division that if Carta can locate shares of XYZ startup, then the buyer agrees to buy those shares at $x, but may pay the investor more if (for example) a higher price is a condition of the board’s approval of the transfer?
[+] [-] Havoc|2 years ago|reply
Presumably the price they go in with is so low that it’s a no brainer and being contractually bound is functionally zero risk.
[+] [-] kdamica|2 years ago|reply
[+] [-] tschwimmer|2 years ago|reply
[+] [-] peter422|2 years ago|reply
[+] [-] yieldcrv|2 years ago|reply
[+] [-] zerothOffset|2 years ago|reply
Liqudity programs like tender offers are price controlled not market controlled and companies are first to tout their RSU values in compensation packages esp when they are overvalued
[+] [-] meindnoch|2 years ago|reply
Oh, these RSUs will totally make you rich one day, trust me bro :-)
[+] [-] blueridge|2 years ago|reply
[+] [-] SMAAART|2 years ago|reply
Using confidential information held on behalf of third parties to become market makers?
[+] [-] zerothOffset|2 years ago|reply
[+] [-] dehrmann|2 years ago|reply
[+] [-] zhivota|2 years ago|reply
Founders may not like it but it's kind of on the startup scene's current proclivity for keeping companies private for much longer than in the past and therefore restricting employee and investor liquidity. These services are responding to a market need. Carta may have broken their agreement with the startup but it is, in my opinion, generally a good thing to allow more price discovery for all investors.
[+] [-] zerothOffset|2 years ago|reply
[+] [-] im3w1l|2 years ago|reply
[+] [-] adoxyz|2 years ago|reply
This requires a high level of trust as there is a lot of financial information at stake.
Carta seems to be taking this confidential information and is potentially sharing it with other investors and soliciting investors to sell their shares.
This is a big no-no.
[+] [-] heads|2 years ago|reply
These are all people with whom you have entrusted important rights such as dressing nicely, staying relatively sober, and not poking the cake. Additionally, the wedding venue has a fire safety limit of 150 people. Any more than this and the authorities shut you down for abusing the privileges they give to small weddings.
Well now imagine that party.com has been emailing your neighbours and mortal enemies the Joneses saying the Smiths have two seats they want to sell and that Beyoncé is going to be there. They also help the diving sell half their table to what turn out to be classical music supremacists who show up protesting Beyoncé’s pop music. One of them also gets drunk and pokes the cake. Thanks a bunch party.com.
In real life, shareholders can do unhelpful things or act with downright hostility so you need people you know and who you trust to behave themselves.
The SEC also give you an exemption from having to register with them (and publish your accounts) but only if you have fewer than 500 shareholders. If a big shareholder splits their holding and sells to a bunch of random people then they risk pushing you over that limit.
Carta / party.com are abusing their position by marketing your shares / wedding invitations behind your back.
[+] [-] sergiomattei|2 years ago|reply
[+] [-] oakhaven|2 years ago|reply
[+] [-] oakhaven|2 years ago|reply
[+] [-] milkglass|2 years ago|reply
[+] [-] shreezus|2 years ago|reply
[+] [-] alsodumb|2 years ago|reply