How CartaX can streamline secondary liquidity transactions for companies of all sizes
The CartaX liquidity platform makes it easy for companies of all sizes to offer secondary liquidity to their employees and early investors.
The private markets run on equity. But until recently, providing liquidity to employees and shareholders has often been a passing thought. Most private company leaders focus on operations and top line growth, forestalling liquidity until they arrive at an exit through a merger, acquisition, or public listing.
Times are changing. As private companies increasingly extend their timelines to a public exit, more company leaders are deciding to pursue secondary transactions as a way of offering liquidity to early investors, satisfying unmet investor demand, and rewarding tenured employees. At Carta, we’ve seen secondary transactions consistently increase year-over-year.
Even as we experience challenging capital markets conditions, we expect liquidity in the secondary market to continue growing and evolving over the medium and long term. The CartaX platform meets this rising demand by giving companies the ability to tailor liquidity programs to their growth stage, goals, and specific liquidity needs.
CartaX hosted a fireside chat to help company leaders learn more about how the CartaX platform and team of capital markets experts work together to create structured liquidity transactions for private companies of all sizes and stages.
Crystal Shen, head of equity capital markets for CartaX, hosted the panel. Joining her were VP of product Adrian Facini and VP of engineering JP Lall. The panelists discussed the purpose and design of the CartaX platform, the transaction frameworks it can support, and the ways the equity capital markets team can bring together buyers and sellers to optimize liquidity transactions for all participants.
An edited transcript of the fireside chat follows below.
Crystal Shen: Thank you for joining today's Fireside Chat, “Driving innovation: Private market transactions on CartaX.” My name is Crystal Shen. I head equity capital markets here at CartaX. Prior to CartaX, I was at Jefferies, Lehman Brothers, and Barclays over the better part of this past decade. I am joined today by my colleagues, Adrian and JP. I'll give them a chance to introduce themselves. Let's start with Adrian.
Adrian Facini: Hi, everyone. I'm Adrian Facini, I lead product for CartaX. Prior to being at Carta, I was leading product at IEX, at BFA, building trading systems for equities trading and brokerage platforms.
JP Lall: My name is JP Lall. I lead engineering here at CartaX. Prior to joining CartaX, I was a managing director at Goldman Sachs for the better part of 20 years.
Crystal: So first off, what exactly is CartaX?
CartaX is a platform for private companies and investors to manage secondary transactions. We pair customizable, company-controlled, secondary liquidity transactions with advisory services. We built this platform for innovators, founders, and executives who want to offer liquidity benefits to their stakeholders, especially employees.
Our solutions address customers' demands for control, speed, and accuracy, with the ultimate goal of really making liquidity more ubiquitous in the private markets. And while Carta has executed secondary transactions for several years now, CartaX officially launched in January of 2021. We offer a suite of liquidity solutions that continues to grow as we work with our clients.
For simplicity, the core solutions we'll focus on today include our robust tender offer product, the ability to conduct customized Carta Crosses or auctions that feature price discovery, and the execution of block trades or bespoke transactions between a limited number of buyers and sellers. We'll discuss how these apply in more detail, as they can take on a lot of different flavors and customizations. So let's dive right in.
I'll start with you, Adrian. As companies increasingly seek liquidity in the private markets, and as we have discussions with them about their objectives, there are several key decisions that have to be made around price, timing, speed of execution, participant eligibility (which really means buyers and sellers), disclosures and access to information, and tax treatment. These transaction levers, as we like to think about them, often help inform the deals that we can structure for customers.
How the CartaX platform enables flexible transaction design
Crystal: How was the CartaX platform really designed, Adrian, to help companies pull on these different transaction levers?
Adrian: Well, when we were looking at building CartaX, we first started with an analysis of the private and public markets. The public markets are a one-size-fits-all market. You can see that companies ranging in all different sizes and shapes all need to fit into one framework. But companies are not all built the same, and they don't all have the same needs. So when we were looking at how we were building CartaX, we really wanted to make sure that we kept the company at the core of how we built the platform—and kept their needs at that core, as well.
We wanted to be able to build a platform that was flexible, and that could support a variety of different transaction types and a variety of different configurations. So at its core, we essentially allow all these configurations to be accessible to companies as they think about the goals that they have for each transaction.
Companies could be looking to offer employees liquidity, so they may have certain requirements around tax treatment or eligibility. Or they’re offering liquidity to early investors—so we have the ability to just allow those specific investors and even specific holdings to be permissioned in the transaction. Or they’re looking to discover price. We have an opportunity to actually aggregate supply and demand—or interest from buyers and sellers—to establish a market-driven price within a range of prices identified by the company. By truly putting the company's goals and their requirements at the core, and providing a flexible foundation to incorporate those goals and those settings into the transaction—that’s really how CartaX was built from the start.
Pricing secondary transactions
Crystal: Thanks, Adrian. Let’s dig into that lever of price a little bit more deeply. It's very top of mind right now, especially in this market where we're seeing spreads really widen between buyer and seller expectations. On one end of the price spectrum is price certainty for companies, with a specific price target in mind, or investors who've already come to the table with terms. On the other end of the price spectrum is price discovery. These are companies that are looking for a repricing event or a means to set an evaluation benchmark.
Adrian, how can CartaX help meet these different price objectives?
Adrian: We have a number of different transaction frameworks that can support whatever the needs of companies are, whether they have a set price up front or are looking to discover. For those that have an already-determined price with a set of buyers, we can support a tender offer. Essentially, buyers have already agreed to purchase some number of shares at a predefined price. So we can help structure that tender offer, in order to then aggregate all of the supply from existing shareholders to meet the demand that's been presented.
We can do that at a large scale, which is a tender offer, or we can actually scale it down to a more bespoke transaction that only involves a handful of buyers and sellers. That would essentially be structured as a block trade. With both of those, we walk into the transaction with a price already identified, and we can support that as part of the configuration of the transaction itself—helping companies simply configure a transaction using the information they have.
The other alternative is to structure an auction. So here again, companies have the ability to identify a price range they're comfortable with. We typically use recent valuations, perhaps from a recent primary, or from a set of historical secondary transactions in the market, to set a range of prices that are going to be used to discover price. We agree on that in advance. Then we use our investor coverage network, bringing in a number of institutional investors and existing shareholders. We discover price through that auction framework as part of the Carta Cross, to identify price and size, and execute seamlessly on the platform.
How CartaX helps companies structure transactions
Adrian: Crystal, I think this is potentially a good opportunity to ask you a question: Just thinking about the lead-up to a tender versus an auction, how do you help companies think about structuring a transaction going into either of those transaction types?
Crystal: Let’s first focus on what's the same between these two types. We start with the goals of the transaction, and we use those goals to inform how we customize the transaction levers that we've been discussing. The CartaX team works with the management team to answer the key questions about these levers. Then we try to do as much of the heavy lifting as we can in the background.
Where things differ is that, in a tender offer, the company often comes to us with the price and the committed buyers for the deal—so it's a matter of working closely with them and legal partners to make sure documentation reflects the intended structure. And our equity capital markets team actually will build a seller model from the company's cap table on Carta to help management think through who can sell and how much. We also layer in market data and best practices to help them inform their decisions. And we help them think through the methodology for cutbacks and allocations. The CartaX team also will host a town hall to help educate employees and provide support for the deal in the lead-up.
With an auction, since there is that price discovery element, our team will get to know the company's story. We'll review investor materials. We can help craft messaging. We'll take a look at KPIs, public and private comps (which you mentioned earlier), and trading history. And we take in all this market feedback to help identify a price range. And we build that same detailed seller model, as in the tender offer, and host employee education town halls, as well—all before running the auction. That’s really how these two will differ in the lead-up.
Crystal: Let's turn to JP for a minute here. As we can see, there are a lot of different elements to consider. JP, how should companies think about timing and speed of execution when they plan for a liquidity event?
JP: I think it's important to understand the different parts of the liquidity event. The first thing to think about is the execution of the liquidity event. A tender offer is legally required to stay open for 20 business days, but it also could take weeks to actually set up. The auction window can be customized. The block, or the bespoke transaction, can actually be customized and done in a minimum of days to a week and a half.
But, again, it really depends on the appropriate pre-work, and I think you went over a little bit about it. The pre-work is understanding the buyers, making sure the buyers and the sellers have the right information, making sure we understand the eligibility, all the different parameters for the liquidity event—the cutbacks, the eligibility. All that pre-work could take a long time, so I think companies that want to do a liquidity event should really understand the amount of pre-work that needs to be done and also the execution time. They probably should consult someone as soon as they can—when they start conceptualizing an idea around a liquidity event—to bake in the right time for that liquidity event.
How management teams can prepare
Crystal: Thanks, JP. Aside from the transaction levers, what else in the overall liquidity experience should management teams look for? I know there's a lot here, so maybe we'll start with JP and then turn it over Adrian.
JP: At CartaX, we really want to relieve the burden of the administration of the liquidity event for the management team. We understand that there are many platforms and brokers that people can choose from, but companies should really think about the overall ease of experience and integration that CartaX can provide, or that any broker can provide.
One of the things that CartaX highlights—to me—is the cap table integration. Carta is the leader in cap table management. A lot of the cap tables in private companies actually exist on Carta. So one of the things we first did was get CartaX connected programmatically to Carta and have the ability to grab that cap table in minutes—so that we have the most up-to-date cap table ready for the CartaX team to model a transaction, and be able to provide the company with the most up-to-date data. The ability to have this data allows us to be ready for any surprises during the transaction, whether we need to exercise options or a buyer is not able to exercise options. We're able to handle those surprises really easily, because we have that cap table.
After the transaction, we're able to instantly (help streamline the settlement process.) That means we're able to (instruct Carta to) move the shares to the appropriate stakeholders right away by updating the cap table in Carta programmatically and seamlessly. We're also able to move money really quickly using our brokerage services. So all the shares are transferred to the appropriate stakeholder, and all the cash is moved to the appropriate sellers. There are no messy spreadsheets or any other documents that need to be sent back and forth.
I talked about brokerage services just now, so maybe it might be useful for me to dig into that. We leverage a banking partner. And this banking partner is a bulge bracket bank that everyone knows, and we use them to house our money transactions. We connect to the bank using a set of APIs, and those APIs allow us to facilitate any money movement transactions through wires and automated clearing house (ACH).
Our customers can easily link their banking details to the brokerage account, allowing for simple fund transfers to happen in minutes or days accordingly through the right protocols. Once an entity has a brokerage account, there's no need for them to ever open it again or anything else. It can always be reused for the next transaction. So once you go through KYC and AML, your brokerage account is ready for the next CartaX transaction. It’s very easy and seamless.
Adrian, can you talk a little bit about the valuations, the tax, and HR?
Valuation and tax considerations for secondary transactions
Adrian Facini: So 409A valuations are another hot topic in this market, and Carta has been a valuations provider for a number of years now—Carta has grown the valuations practice to be the largest in the private markets. We execute more 409A valuations than any other provider. And through this, we've gained an incredible understanding of the private markets, and it provides us with an incredible amount of data to help companies think through how to value their own businesses.
And just as Crystal was mentioning before, that lead-in to a transaction, looking at private and public market comps—we now have this wealth of benchmark information that we can leverage to help companies understand how to value themselves leading up to a transaction. But after a transaction, there's typically a 409A valuation that's done, as well, after a significant liquidity event. So the things that we're talking about, whether it's an auction or a tender offer, qualify as that.
So what you'd like to do is just get back to running your business, and not have to worry about all the next steps that come with coordinating a 409A valuation. We're able to seamlessly filter the information about the transaction—both the structure and final execution—over to our 409A team, to speed up the turnaround time for producing that valuation. It cuts down on the administrative burden on companies, allowing Carta to really serve a holistic set of solutions.
Now speaking of which, on the tax side, we have a number of tax considerations that come up during transactions. It's important that we set up transactions in a way that we are withholding the proper amounts from all of the sellers in a transaction. This could be done much more seamlessly with HRIS integrations, or integrations with the HR technology platforms that companies use. Carta has actually been integrating with a number of the major providers. Just last month, we had an announcement about an exciting integration with Rippling: (We’re) bringing all the salary and employment information from Rippling into the Carta platform, in order for companies to better manage the equity that's in the platform, as well as any of the tax integrations that are in the platform. So we're able to incorporate that salary information during a transaction, as well as tax rate information, to provide accurate tax withholding (calculations) during the settlement process.
If you have employees selling options, we're able to do a cashless exercise of those options and withhold any necessary funds as part of that transaction, then ensure that those withholdings are actually passed directly to the company, in order for the company to remit. This gives companies an incredible ability to—as JP was saying before—seamlessly conclude a transaction by both settling it and updating the cap table, but also withholding taxes and remitting those to the appropriate authorities. This really helps everybody in the transaction, from the employees participating, or any of the shareholders participating, all the way through the company and the administrators, (by) reducing the overall administrative burden of running transactions and allowing companies to focus on building their business.
Block trades and bespoke transactions
Crystal: Thanks, Adrian and JP, for highlighting these points of integration. Let’s pivot away from structured deals for a moment. Just last week, I was speaking to a founder who was seeking a way to monetize a small portion of his shares, because the company has been in existence for a while.
What about this scenario, in which companies might have one-off sellers, such as from early investors or founders, where they don't really have the need for a full, structured deal like a tender offer or an auction? Maybe I'll bring this back to you, Adrian.
Adrian: Yeah, it's a great point. Not every transaction needs to be a broad-based transaction with a number of different shareholders invited. A lot of times, there are distinct liquidity needs that individuals have, or special circumstances where providing some liquidity to one or a small handful of individuals is really required. So in this case, a bespoke transaction or a block trade is really the right fit for the need that a company may have.
All of the same benefits that we talked about—the integrations, and the services provided, as well as the ability to tailor transactions—still apply for block transactions that occur on CartaX. We leverage that same foundation, that same framework, to provide all those benefits to companies. We just scale it down to the limited number of individuals and institutions that will be participating in this type of transaction—again, just putting the controls in the hands of the company to tailor the transaction, to meet the needs of shareholders that are participating in this particular transaction. The way that we've structured it, it really does put these block transactions and bespoke transactions as first-class citizens on this platform. They have the same benefits that we just talked about across the board.
We structured block transactions in two distinct ways. We have an option for companies that have a number of shareholders who have talked to them about finding opportunities for liquidity, as well as having a number of incoming investors looking to buy shares of the company. Companies in this situation are able to actually pair these buyers and sellers together, but don't necessarily want to take on all the burden of going through the process of executing a transaction and administering the cancellation of shares, issuance of new shares, and movement of cash. Really, they want to step away from that. So we give them the ability to actually handle this from an administrative perspective.
Companies can come to us, provide transaction information, give us an introduction to buyers and sellers, and we'll take care of the rest. We'll take care of structuring the transaction, leveraging whatever agreed-upon documents the company may have for these types of transactions, or provide our own templates. And then we run the transaction on our platform, to seamlessly move cash and securities, and make sure the cap table stays up-to-date immediately—as soon as the transaction closes. We leverage all the same capabilities, but also the KYC and AML capabilities for any of those new investors joining your cap table.
The other option is if you have employees or shareholders looking for liquidity, but don't necessarily have the time to look for buyers or don't have them coming in—we can leverage our investor coverage team and network to bring in a number of institutional investors that are in our network, in order to purchase those shares. So we can source that liquidity for you, allowing shareholders to enjoy the liquidity and allowing the companies not to have to focus on structuring these transactions—again, reducing the administrative burden overall and allowing this to be a seamless experience for anyone who’s participating.
And another thing, just looking at some of the other platforms that offer these types of services: Because we're integrated as part of one solution—the liquidity platform as well as the ownership platform—it really does provide a seamless experience for anyone participating. We have the ability to automate some of the ROFR processes, as well as simplify the administration from a company perspective. We do this at far cheaper rates than some of the other providers in this space.
Disclosures and information flow during a transaction
Crystal: Thanks, Adrian. It looks like we’re starting to get some questions from the audience. JP, maybe I'll do one more question with you and then we'll open it up to Q&A.
I think this is an important topic to hit regardless of transaction type: Information flow can often be an issue for the private markets. We deal with issues about information asymmetry, access to information: What's the right level of disclosure? How does CartaX approach this?
JP: Thank you for the question, Crystal. At the heart, one of the things we think about is the security and the privacy, and also sharing this data symmetrically to everyone. So again, relieving the burden for the company, we at CartaX provide the ability for companies to securely share documents of the transaction and sort symmetrically to all the invited participants. Privacy is one of the key features of the platform. So all the documents are watermarked and are non-downloadable. We want to make sure that we have the right set of privacy for the transaction itself.
We've made sure most of the documents are on platform—so they’re always available. We also attempt to have the signing and the collection of those documents on the platform, so that it's all aggregated in one place. The transaction documents—as you go through the process of buying, you have to sign and get all these transaction documents—they’re on the application of the platform itself. And then at the end of the liquidity event, once the shares have been sold and the cash has been distributed—all the transaction documents are collected into a transaction binder for each of the participants, so that every participant has the availability to look at all the documents.
Also, very similar to public markets, all the participants receive a statement summarizing all the transaction details that happened: the shares that were sold, the cash that was exchanged. It’s like a confirmation at the end of the transaction. And of course, at the appropriate times, 1099-B generation is done, and so that you have the appropriate documents for tax purposes.
All these things are on-platform and a part of the transaction process that we do, and that's available for our participants. Actually, can I ask you a quick question?
JP: The right level of disclosure is usually related to the company's fundamentals and stage. We can definitely help through some of the advisory services. But beyond just the execution, what else does your team advise customers on their liquidity programs?
Crystal: What we try to do, especially as companies are maybe new to secondary transactions, is help them think through their investment positioning. (That includes) some of the work I talked about earlier, in terms of thinking through their investor materials, their key performance indicators, how they think about valuation benchmarking—and ultimately, what price they should set, and whether it's a tender offer or a Carta Cross.
We want to help companies think through the long run—and it's not just about that first transaction with CartaX. It's how to set up a program for success if they want to set up recurring transactions in the future, regardless of type. I think the good news is once companies are already onboarded with CartaX, they can really rinse and repeat—and with a lighter lift each time. Everyone can continue to seek liquidity on the CartaX platform in the future.
The CartaX investor network
Crystal: We are getting a steady stream of questions, so with these remaining minutes, I hope we can address at least a few of them. We have been talking a lot from, I think, the company perspective and how CartaX can service companies at this point. We are getting some questions about whether CartaX engages with investors and what is the nature of that engagement. The quick answer is yes, we do engage with investors. But maybe I'll turn over to Adrian or JP, whoever wants to take this question a little bit further, in terms of how CartaX services investors, as well.
Adrian: We do have an investor network. We aggregate a number of different investor relations. We definitely focus on institutional investors as part of that network. So we provide those investors with access to liquidity events—they're looking to be buyers in transactions that we're structuring. But there’s also existing investors that come in as part of a structured transaction.
In a tender offer, you have buyers who are usually identified in advance, and you have existing shareholders or early investors who are looking for liquidity. All of those investors are brought into the transaction and provided the ability to either buy or sell, depending on the permissioning that's set by the company and the transaction itself. So we essentially are allowing for these structured transactions for those investors to participate in, and then also bringing them opportunities, whether through an auction or some of the block transactions that we're looking to structure, as we look to find and source demand in the market.
Crystal: Thanks, Adrian. I think to make it clear for the audience, we do engage investors both from that buyer perspective and seller perspective. So if companies are coming forth with supply or interest in selling, we can actually leverage our investor network to go and source some of that demand, too, if you don't have any existing investors already interested in your equity.
And let's try this next question. And the question is more related to, I think, our international presence. How does the product service non-U.S. companies or more international populations?
Adrian: I'll just jump in here. We have support for a number of different jurisdictions around the world, but we open accounts for sellers around the globe. As the pandemic has continued, we’ve realized that employee shareholders are now in every corner of the planet. So we bring all of those shareholders onto the platform and allow them to participate in transactions.
We have investors located around the globe, as well. And again, we open accounts for them. We move money for them as they look to purchase shares, and in the case of sellers, to receive their proceeds. Companies incorporated around the world are also supported. We're still going through an analysis of just what the reach of the platform is, in terms of all of the countries that we can support. But we've identified a couple dozen countries where we have the majority of our companies incorporated in Carta—we've been targeting (those) for support on CartaX.
Those companies come up to structure transactions, and we support a number of equity types found in those international jurisdictions. We've really been doing a decent amount of work to support buyers, sellers, companies, and the equity types that are located around the globe.
The last piece is from a tax perspective. In the tax engine, we allow companies to configure any special jurisdictional tax rates that folks would like. It has the full flexibility to identify a specific jurisdiction and put custom tax rules in there to handle the needs of shareholders selling in a jurisdiction located outside the U.S.
Crystal: We're running right up on time but we did have one more theme of questions, in terms of who can participate on CartaX from a company perspective: early stage, late stage, Series A, and whatnot. What I would say to that question in particular, is that the reason we've built out this liquidity platform is so that we can customize based on the stage that you're in.
We're not limited in servicing you if you're late-stage. So it really is important for us to have conversations with these companies, to figure out exactly what your liquidity needs are—we'll find a solution that ultimately works for you. I know we still have some more questions left in the queue, but unfortunately, we are up on time.
We'll look to follow up with those participants with outstanding questions after this, or feel free to reach out to us for more information on CartaX.com. Thank you so much for joining us today in this discussion. Thanks to my colleagues, Adrian and JP. We hope to work with you soon on CartaX.
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