In the world of venture-backed companies, valuations are a critical piece of the puzzle—impacting fundraising, stock options, financial reporting, and long-term strategy. When it comes to valuations, many businesses turn to Carta, a well-known platform that allows companies to electronically manage equity, perform valuations, issue securities, and track their cap tables.
Over the past decade, Carta has become a dominant force in the 409A valuation space. However, despite its widespread adoption, the reliability and transparency of its valuation reports have come into question.
We’ve obtained copies of Carta’s most recent 409A valuation reports, and many of these reports didn’t include total equity value or total enterprise value, which points to their valuation outcomes potentially being unsupportable. In the valuation industry, listing the professionals responsible for an analysis is a best practice that enhances credibility and accountability. However, Carta has stopped listing appraisers on their reports, making it impossible to verify who conducted the valuation and their qualifications. This practice is non-compliant with Uniform Standards of Professional Appraisal Practice (USPAP) and could raise red flags in IRS or SEC audits.
Additionally, Carta’s reports do not include a signature, which is a standard requirement in the valuation industry. This omission is particularly concerning given the limited experience of Carta’s valuation team.
When it comes time to sell the company or go public, the company goes through a rigorous audit. A major part of the value of having an independent appraiser is to respond to questions and support the valuation to auditors. Carta doesn’t provide audit support services.
Fair question. In January 2024, Karri Saarinen, CEO of Linear, publicly criticized Carta for allegedly using confidential cap table information without consent. According to Saarinen, Carta approached one of Linear’s undisclosed angel investors with an offer to sell Linear shares, without prior communication or approval from Linear.
In response to the allegations, Carta’s CEO, Henry Ward, acknowledged an internal breach of protocol and announced an investigation into the matter. However, the incident underscores the importance of human oversight and professional judgment in managing sensitive financial data and conducting company valuations. This incident raises serious questions about Carta’s data handling practices and the potential risks of entrusting sensitive company information to automated platforms.
There are real risks here. The IRS provides safe harbor for equity issuances issues within a year of a 409a valuation by an independent appraiser. Without one, if a company is later found to have set exercise prices below fairness market value, it can lead to significant tax penalties or even the invalidation of the equity issuance.
According to Carta’s own data, its valuation team consists of approximately 60 people with a combined 200 years of experience, an average of 3.3 years per person, with many analysts likely having less than two years of experience.
This raises two critical questions:
A fundamental issue is that companies like Carta are loyal to their venture investors, not their customers. They care more about their own valuation than properly performing your valuation. Given Carta’s loyalty is not to its customers, their behavior is not likely to change so clients should position themselves to move off this platform as soon as possible. The best and easiest way to start this process is to use an independent valuation provider not related to Carta or other cap table platforms.
Clients who switch from Carta frequently report that their previous valuations did not make sense given their stage of development. Some companies received valuations that were too high, too low, or inconsistent with their financial realities.
One particularly egregious example involved a Carta valuation report where the concluded total equity value was negative, which is theoretically and practically impossible. In the same report, Carta assigned a positive value per common share despite the company’s supposed negative equity value—an indefensible contradiction.
Additionally, inconsistencies within Carta’s reports raise concerns. In one instance, a Carta report listed different probabilities of failure on back-to-back pages with no explanation or supporting data. This type of oversight highlights the risks of relying on an automated, opaque valuation process.
A thorough examination of Carta’s 409A valuation reports reveals major deficiencies that businesses should not ignore. The lack of transparency, absence of key valuation metrics, non-compliance with industry standards, and reliance on an inexperienced valuation team all pose serious risks. Additionally, Carta’s disclaimer against using its reports for ASC 718 further demonstrates their limitations for financial reporting purposes.
In contrast, firms like Venture First provide experienced professionals, transparent methodologies, and reliable ongoing support. For companies that value accuracy, defensibility, and compliance, choosing a trusted valuation provider is essential.
Before relying on Carta for your 409A valuation, consider whether the risks are worth the convenience.
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