Auction case study: January 2021
This case study is subject to disclaimers provided below.
Private markets liquidity is here: CartaX
Carta has created a new paradigm for using equity to attract, incentivize, and retain talent, solving for the liquidity problem that has historically existed in the private markets.1 In its mission to create more owners, Carta has built the solution—CartaX. CartaX provides a vertically integrated platform for recurring liquidity events that is designed to deliver exceptional service and outstanding results. Carta held the first auction on CartaX in January 2021 for its own stock.
“It is an odd artifact of history that private markets have zero liquidity, public markets have hyper-liquidity, and there is nothing in between.”
—Henry Ward, Carta CEO
The market for talent has never been more competitive. Employers compete based on employee experience, cash compensation, and equity incentives, among others. As Carta grows, its competitive set has changed to larger, public companies, but the compensation playing field is not level among them, as public competitors offer employees fully liquid equity. Carta has run tender offers in the past to help employees realize equity value, but they were high-effort transactions that occurred months after a primary. In a world of exponential growth rates, this means that Carta’s employees did not get the benefit of their operational execution during these tenders - price discovery was absent. More importantly, employees were not able to consistently predict when liquidity would be available.
Carta had the following objectives in mind when working with CartaX to design a structured liquidity program for the future:
- Recurring employee liquidity: reducing the risk around equity comp to attract and retain top talent, without the time and cost of a tender offer
- Mature investor relations: expand Carta’s investor network beyond the traditional venture ecosystems to aid in the strategic growth of the company
- Market-driven pricing: reprice Carta’s valuation given favorable macro backdrop without dilution and increase participation compared to arbitrarily priced tender offers
- Reducing the burden of disclosure: alleviate the burden associated with disclosure for liquidity events without quarterly earnings calls and regulatory filings of public exchanges
The future of private markets liquidity
Carta concluded its first Carta Cross2 on CartaX successfully clearing $99.7MM in value between over 400 market participants and 52 investors at a $6.9B implied valuation, representing a 2.2x increase in implied valuation to Carta’s last primary. Carta, its shareholders, and investors await the remaining three quarterly transactions throughout the rest of 2021.
Carta structured its Carta Cross by thinking through how much volume the company was comfortable permitting to transact on CartaX over the next year. The CartaX team provided data-driven insights and market trends to help Carta help determine the right liquidity profile for the business. Carta also decided as a company to offer recurring liquidity, adopting a quarterly transaction cadence made possible by the low-touch liquidity solution on CartaX. Now, employees, ex-employees, contractors, and early investors may be eligible to sell a portion of their equity on a recurring basis.
Based on a target of 6%-8% of fully diluted shares trading on an annual basis, Carta settled on the following participation caps for each shareholder group in the first few auctions:
|Seller relationship||Participation caps|
By offering an alternative to public liquidity combined with the potential of private company growth curves, Carta’s compensation packages combine the best of both worlds in the war for talent.
Process and timeline
The CartaX team worked closely with Carta on an efficient onboarding process that ensured Carta’s compliance with the CartaX listing requirements. Once approved, Carta spent the next four weeks leveraging the CartaX investor platform to present an Investor Day, host a live Q&A session, and conduct strategic meetings with investors that Carta considered possible long term partners for the business. Once the transaction launched (a few days after the Investor Day live Q&A), a standard 13 business day auction3 opened for buyers and sellers to place orders in the Carta auction.
Carta held a remote Investor Day to tell its story to a group of institutional and other sophisticated investors that expanded beyond its traditional, existing venture investor base. The Investor Day, hosted by CartaX, enabled Carta’s management team to reach a broader group of investors in a single event versus embarking on a traditional repetitive “roadshow”. Carta leveraged the Investor Day event platform to quickly measure investor engagement and sentiment and be proactive with those investors most engaged and interested in Carta’s business.
The CartaX event platform facilitated participants’ access to all trading disclosures and business metrics. Carta maintained control over the information disclosed symmetrically to all parties by making use of the CartaX access controls like watermarking, and restricting download. Having full control over disclosure and participant eligibility eliminated any concerns about asymmetrical information being made available to certain participants in the context of the auction.
Only 10% of investors invited were existing investors on Carta’s cap table. Through the Investor Day and auction, Carta expanded its investor reach to include over 100 institutional asset managers, hedge funds, family offices, sovereign wealth funds, direct secondary funds, and other sophisticated investors. Carta and CartaX are excited to see how this diverse group of investors, many of whom may have had limited access to invest in later-stage private companies before, will add strategic value to Carta’s mission to provide liquid equity for all.
Carta Investor Day
Invited investors by investor type:
The price discovery process was facilitated through the Carta Cross. The Carta Cross cleared successfully at an implied $6.9B valuation, a 2.2x premium to Carta’s last implied valuation following their last primary raise in June 2020.4 Carta effectively obtained a repricing without the dilution associated with primary financings. This increased market value of Carta’s stock may provide leverage as Carta looks towards structuring equity grants and a potential M&A currency.
Carta traded $99.7M of common shares at a $6.9B new valuation in its CartaX debut, a 2.2x premium to its last preferred round
Carta’s first auction on CartaX exceeded expectations, further exemplified by strong buyer demand and seller engagement, reaffirming Carta’s mission to provide liquidity to the private markets with CartaX.
|Seller relationship||Participants||Seller trade rate||Transaction volume ($M)|
As a CartaX listed company, Carta has already committed to recurring auctions to continue to deliver on its mission to return value to its employees and investors. Looking ahead, Carta can use the CartaX platform to transact other forms of equity, including RSUs, and primary raises as well. Carta employees, investors, and founders all eagerly await the next transaction.
“CartaX gave us efficient access to a broad set of investors, unlocking demand that we could never have efficiently accessed before. Proud to be the first to list on CartaX.”
—Charly Kevers, Carta CFO
“Liquidity will be the most sought after employee benefit for the most competitive private companies.”
—Suzy Walther, Carta Chief People Officer
1 The new framework incorporates services by Carta, Inc. as a provider of cap table management services and transfer agent and Carta Capital Markets, LLC as a broker-dealer operator of the CartaX platform.
2 Carta Cross is the CartaX auction process, designed to efficiently identify a market driven price and allow equity holders to sell holdings to investors. “Cross” is used in the world of financial markets to indicate that it is a method for matching supply and demand to arrive at a market clearing auction price.
3 Subject to extension.
4 Relative to a $3.1BB implied valuation following Carta’s Series F Preferred primary capital raise in June 2020.
Under US securities law, every offer and sale or resale of a security must either be registered with the SEC or exempt from the registration requirements of the Securities Act of 1933 (the Securities Act). However, private sales of unregistered securities may occur subject to statutory exemptions and certain codified common law exemptions, and as such, all transactions facilitated on CartaX qualify under one or more appropriate secondary market registration exemptions. Securities purchased on CartaX are not freely tradeable. No public market exists for securities traded on CartaX and that there can be no assurance that a public market for such securities will ever exist. Securities purchased on CartaX may not be transferred unless such securities are registered under the Securities Act or other applicable securities laws or unless exemptions from such registration requirements are available. Only the Issuer of securities traded on CartaX may file a registration statement with the SEC or other applicable securities commissioners and the Issuer is under no obligation to do so with respect securities traded on CartaX. Exemptions from registration may not be available to purchasers of securities on CartaX, and therefore they may not be able to transfer or sell all or any of the securities in the future.
In order to be able to trade on CartaX, a participant must either be (i) a shareholder of an issuer whose shares are being traded on CartaX and be specifically permissioned by the issuer to sell some or all of Customer’s shares in a particular transaction, or (ii) an investor specifically permissioned either by the issuer to participate in a particular transaction. CartaX is not a continuous market. Transactions facilitated on CartaX are bilateral in nature, and there is never any guarantee that there will be sufficient counterparty interest to result in crossing interest. CCMX does not guarantee whether, nor the terms on which, any order may be filled. There is no guarantee of a participant being permissioned to participate in future transactions on CartaX.
Certain terms used herein may carry different meaning to how those terms might be used in other contexts, for example in relation to public markets, primary capital raisings, or initial public offerings. An explanation of such terms and their respective definitions in this context may be found here.
While not directly compensated for the testimonials herein, testimonials are provided by executives of Carta, Inc., which is the parent company of CCMX. Testimonials may not be representative of the experience of other customers and past performance is no guarantee of future performance or success of future transactions on the platform.