Finally, a private stock exchange

Today was a big day. In 2013 we raised our seed round on the pitch of “building the Nasdaq for private markets.” Eight years later we call our exchange CartaX. Today Carta closed its first trading session as the first issuer on CartaX.

First, some quick statistics on today’s trading:

Carta market cap: $6.9B

Total trading volume: $99.7M

Number of executed orders: 1484

Number of market participants: 414

Second, a few things we learned.

Carta secondary shares traded at $6.9B, roughly 2x our $3.1B Series F nine months ago. There are two reasons we traded at such a premium to our last round price.

First, after seeing Lightspeed and Tribe lead a $200M Series F investment in Carta, most investors, including those on CartaX, were willing to pay a premium to what Lightspeed and Tribe paid. The reason is they get to buy shares of a freshly capitalized company that also has powerful market signal that LSVP and Tribe see Carta as a good investment. Venture capital, compared to other forms of capital, is always the most expensive capital (i.e. pays the lowest price) because they are the first capital in.

Second, instead of talking to 10–15 venture funds like we did in our primary round, CartaX has 53 institutional investors from around the world all competing for Carta stock. This gave us price support and significantly better price discovery.

That is why tender offers are good for investors and bad for employees. In most markets more investor demand means higher prices. But in private markets, investors fix a price and buy as much stock as they can at the same price. That’s why venture capitalists fight to “get into a round.” No matter how much demand exists, once the price is set by the lead, the price doesn’t change.

It’s also why investors railroad CEOs into agreeing to do tender offers in the termsheet. They can lock in pricing and buy more shares at the same initial price. It is a clever trick for investors to buy more shares at an unchanging discounted price. And it is employees that sell at that discounted price.

If we had done an employee tender alongside our Series F, employees would have sold at half of what they were able to sell on CartaX. But because we did proper price discovery after our primary financing, employees were able to sell secondary shares at a 2.5x premium. Maybe we can call that the CartaX Lift.

At Carta, we are running a trading window once a quarter. The schedule for the next year is published for all shareholders, employees, and investors to see. Everyone knows when they will get to trade Carta stock again. We have eliminated duration risk for our shareholders.

It was interesting to see employee trading volume as compared to historical tender offers. Employee participation is much higher on CartaX. That’s because employees were able to express price preferences through limit orders rather than have to accept a take-it-or-leave-it tender offer price. This ability to express liquidity preferences created opportunities for sophisticated liquidity strategies which employees took advantage of.

In aggregate, most employees sold relatively modest amounts. The reason is employees know they will have opportunities to sell every quarter so they can match their liquidity needs to their lives. If they want to buy a house in a year, they don’t need to sell now. They can wait until the trading window closest to when they are ready to buy. In contrast, tender offer events are non-recurring and sporadic so employees have to contend with an all-or-nothing approach to liquidity. If they want to buy a house a year from now, they have to sell everything now because it might be two years before they get another chance. It is hard to plan a life that way.

In our first trading session we only allowed shareholders to sell. But there is no reason we can’t sell out of treasury in the future. Once we have a liquid and active market for our shares, (in our case we have enough liquidity to support ~ $100M of volume per quarter), when we want to raise primary capital we simply sell common shares out of treasury.

This is powerful for a couple of reasons. First, we get better price discovery on CartaX than going door-to-door on Sand Hill Road. Second, all shares bought on CartaX are common stock. There is no preferred stock, board seat, or covenants to deal with in a primary.

But perhaps most importantly, CEOs and CFOs don’t have to spend months raising money, doing roadshows, meeting with investors, and negotiating termsheets. CartaX is the mechanism for creating demand for a private issuer’s stock. Once that demand is created, CEOs and CFOs can sell treasury stock into that demand any time they want so instead of fundraising, they can focus on building their company.

CartaX, the private stock exchange, is the next milestone in our multi-decade march to rebuild the world’s financial system. Below is the slide I pulled from our Series A deck in 2014. We’ve come a long way since then but we have longer to go. Stay tuned for more announcements coming….