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How Carta rebuilt the math behind managing startup equity

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One of the keys to a successful product is to automate the boring stuff. And to the average person, the idea of issuing a stock certificate is probably pretty low on the list of exciting things to do on any given day.

For Henry Ward, a financial infrastructure geek, it's thrilling. And so is the prospect of seamlessly managing 409A valuations and building a risk model for private markets. The kinds of things you'd try to explain to your parents to the sound of crickets are some of the biggest problems Ward is tackling at Carta. After launching in 2012, Carta now has a dozen products aimed to automate all this for companies and investors.

"An investor came to me and said, 'Henry, you're a finance guy, why is it I can buy General Electric stock for seven bucks (at the time)?'," Ward said. "But it's $20,000 and 60 days to invest in two founders in a garage. And you literally get a paper stock certificate in the mail. It seemed like an incredibly bifurcated world with an arbitrary line between public and private."

Carta at face value is a collection of financial tools that serve varying niches in private markets. That's by design: each time Carta spots an opportunity, it builds a product. Despite the constant threat of consuming that entire niche, Carta has continued to push out product after product. Carta also raised $300 million at a $1.7 billion valuation in May.

But there's a common thread behind all those products. It's one that's more fundamental: financial operations for private companies needed an entirely new breed of mathematics. Ward, with minors in mathematics and computer science, started a company to design a new risk model for private companies altogether.

"The current branch of financial mathematics is all built around the Black-Scholes model," Ward said. "That all assumes that the world is normally distributed, which is close enough in public markets. In the private world, it's completely different. It's power law."

That shift from the Black-Scholes, the standard model for pricing options (or a "put"), is essentially moving to a risk model that assumes most startups will fail. And that's something that's taken as dogma in Silicon Valley. Assuming a startup will fail is (unfortunately) considerably less risky than assuming Facebook would fail just prior to going public. 

Back to the math: Ward had to figure out how to find a bunch of mathematicians that would actually get excited about the thrilling prospect of redefining how to provide a 409A valuation. If Ashton Kutcher tweeted out something to that effect, the entire world would think he was going crazy. But for Ward, it meant casting the right kind of hiring net to attract those kinds of engineers. 

He was looking for a particular kind of engineer: a Python and Django developer who lived in the southern part of the San Francisco Bay Area that was excited about fintech. It was a small net, but it turned out that there were plenty of engineers that were excited about it. 

The alternative to a product like Carta at the time was hundreds (or thousands) of dollars in legal bills and a whole lot of waiting to issue a stock certificate. But when it came to automating the boring stuff, Ward meant going through literally every step. He would shadow every single step that a paralegal would take when issuing a stock certificate, down to which direction they opened the binder to begin.

"This sounds crazy in 2019," he said. "But this is literally how they did it in 2013."

One of the critical elements of success, Ward said, was communicating where Carta was saving startups money for all these necessary operations. Selling cap table management as a SaaS product was tougher, especially when companies already had software they were using. Ward initially tried to sell it as a subscription—a better economic model, he said—but wasn't getting the interest Carta needed.

Ward then tweaked the pricing model to selling the service on a per certificate basis. While $20 per certificate on paper seemed like it would add up quickly, the message was clear: Carta was making the process of issuing a stock cert cheaper. That process requires a paralegal to handle some of the mechanical elements, which can end up costing more than $100. Selling a product that dropped that to $20 made a lot more sense when explained that way.

Carta would eventually flip to a SaaS model, just as Ward originally intended. But it was the same product sold with two different pricing models—and messaging it the correct way mattered. 

"I knew SaaS was a better way to run the business," Ward said. "It's amazing to me how much just the framing of how they made price comparison mattered. When I go to business school events, I tell students that story. Find the business model that works for now, and get going. You can always change it later."

While the products seem niche, they all serve the same network—and it's the investors and companies in that network that make its growth possible. If a venture capitalist uses a Carta product and likes it, there's a good bet they might recommend another Carta product to their portfolio companies. In the early days Carta would manufacture discount codes for those companies, but a lot of times it was merely about writing an email that was easy to forward.

When Carta got started in 2012, "fintech" just meant payments. It was a time when companies like Venmo or Stripe were considered young fintech upstarts. At the time, Carta was called eShares. They ended up changing the name eventually, if only in part because someone else held the eShares.com domain and demanded millions of dollars. After whittling down from 50 names, eShares became Carta.

"I'm always paranoid that we're going to run out of oxygen," Ward said. "We launched cap tables in January 2014. In April 2014, we launched 409A valuations. And then in October, we launched expense accounting. We've just been launching new products every three to six months. We're very much the opposite of the conventional wisdom of 'do one thing really well.' We spread our bets, and try to do all of them really well."

While Carta hit unicorn status this year, much of Ward's problems remain the same: hiring, keeping employees happy, and communicating the vision. While his problem set has narrowed over time—he isn't looking for office space anymore, for example—many of the problem areas from Carta's inception still exist. Those problems will always be there for the founders.

"When you get bigger, the problems are the same—they're just bigger," Ward said. "A seed founder has a huge problem when they can't get one or two coworking desks. You can't imagine the number of lease problems we have with a new office; it's the same problem. It's just bigger. Instead of 12 desks, it's 300 desks, but it's literally the same problem."

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