Henry Ward is the CEO and co-founder of Carta, which is a global ownership management platform that helps companies, investors, and employees manage their equity. The company has raised close to $150 million from investors like Meritech, Tribe Capital, Union Square Ventures, Spark Capital, and Menlo Ventures. Carta has a valuation that is rumored to be over $1 billion.
In this episode you will learn:
- Bouncing back from a failed startup
- Understanding when is the time to pull the plug
- Building meaningful relationships
- Recruiting outside of the US for top talent
- The importance of fundraising as an exercise for entrepreneurs
- Making product meetings productive
- Combining persistence with listening
About Henry Ward:
Henry Ward is the CEO and co-founder of Carta, a software platform for founders, investors, and employees to manage equity and ownership.
Since its inception in 2012, Carta has managed hundreds of billions of dollars in equity at more than ten thousand companies, helping companies like Robinhood, Tilray, and Union Square Ventures manage their cap tables, valuations, portfolio investments, and equity plans.
Prior to Carta, Henry was founder and CEO of Secondsight, a portfolio optimization platform for retail investors.
He also held leadership positions at software companies including Reddwerks Inc. and BetweenMarkets.
Henry graduated from University of Michigan with a BGS in Mathematics and Computer Science and holds a MSC in Market Finance from EDHEC Business School.
Connect with Henry Ward:
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FULL TRANSCRIPTION OF THE INTERVIEW:
Alejandro: Alrighty. Hello, everyone, and welcome to the DealMakers show. Today, we have someone really, really interesting. I think that we’re going to be learning a lot about cap tables and how to keep them in place, and also well-structured. So, without further ado, Henry Ward, how’s it going?
Henry Ward: It’s good. Thanks for having me, Alejandro.
Alejandro: It’s definitely a pleasure to have you, Henry Ward, CEO and Founder of Carta. So, why don’t we do a little bit of walk through memory lane here? I see that you went to Michigan, and then after that, you actually did your business school, not in the U.S., but you went to France. Why did you do that?
Henry Ward: You know, it’s been seven or eight years in Texas working for a handful of software companies, and always had an interest in quantitative finance. I also was an avid cyclist. So, I thought I’d go to France to ride my bicycle, study, and get a Masters in Capital Market Finance. So, that’s what I did, and then I worked at an investment bank for a short period of time in Paris. Then moved to the Bay Area. Then started a couple of companies.
Alejandro: Got it. What got you into those software companies. I see that the first one was at Trilogy, and then you did SAP. Is that right?
Henry Ward: Yes. I was recruited to Texas by Trilogy, which at the time was the Google that didn’t become Google, but it was hiring a lot of smart, young software developers to build really cool things. Had that kind of early Google culture of innovation and trying many different things. Then a lot of companies were created out of ex-Trilogy people. So, you have a Trilogy founder go start another company, and I worked for several companies of people that I had worked with at Trilogy and just followed them into their companies. Then naturally, as my career progressed, I eventually got to start my own, and then entire other former Trilogy people as well to come work in my company.
Alejandro: Let’s talk about this first company and you getting the entrepreneurial bug. How did that happen?
Henry Ward: My wife at the time, my ex-wife had moved to California for her dream job, and I followed her here. It was one of those things. I never actually planned to start a company. It was one of those things where if your wife gets a job in Hollywood, and you took drama class in high school, and you thought it might be fun to act again, you should audition just to try it out. And so I did, and I started a company called Secondsight which was an earlier, less-good version of Betterment. Basically, I was building trading tools for investment bankers in Paris, and I wanted to build the same tools for my mom and retail investors, and give them the same access to information that investment bank traders had. That company completely died. It went nowhere. I couldn’t even get the seed round done. But I spent a year and a half grinding away at it, and walked away being depressed, but also thinking to myself, “I couldn’t imagine doing anything else now. If I had that much fun as a failed entrepreneur, I can’t imagine how much fun it must be to be mildly successful.” So, I decided I’d take another swing at it. Then that swing became, was eShares, now Carta. I’m so glad the first company died because this is a much better idea than that was.
Alejandro: Before we get into Carta, which is an amazing story, I want to dig deeper a little bit on this one, on Secondsight. How did you come up with the concept?
Henry Ward: In my previous job, I was supporting fixed-income traders that were constructing portfolios on fixed-income debt, basically country by country. So, this was actually just after the crisis. Debt yields across Europe were all over the place, and there was a big business in creating and arbitraging between those yield curves and then constructing a portfolio around them. My job was to do the portfolio construction algorithms which really was basically how do you optimize a portfolio. I was doing these portfolio optimization algorithms and tools for these traders, and we were making tons of millions of dollars on these portfolio optimization tweaks. Then my mom would call and say, “Hey, should I buy this municipal bond that a financial advisor called and told me I should buy?” It was just the discrepancy between the haves that the bankers that have people like me to build tools for them, and then the moms and pops that are trying to manage their 401K, the discrepancies and tools and information is so wide. So, I wanted to democratize that information and software to retail investors. That’s what I built, and I went to market with it. This was in 2011, 2012 where FinTech was really not a thing in Silicon Valley. FinTech was payments that nobody understood or was interested in capital market financial software. So, I couldn’t get that. Even Wealthfront and Betterment had really struggled in the early days until they established the category of Rowboat Advisors. They were just much better at it than I was.
Alejandro: At this first attempt, were you the solo founder, or did you have other people?
Henry Ward: I was the solo founder.
Alejandro: Was it just like yourself doing this? Did you get a team, or what was the progression of the business?
Henry Ward: It was just myself starting it, and then I hired contractors off of ODesk (now Upwork), and I think it was Elance to help me. But the team never got larger than maybe four or five of us. It was all personally funded in the early days until I tried to go out and raise capital, and I couldn’t.
Alejandro: Look, I think that the fact that you were at it for a year and nine months is amazing because there are people that are at it for years and years and years until they finally are able to really pull the plug. So, for you, this led to a massive success which we’re going to talk about in just a minute here. For you, what was that moment where you said, “You know what? I think it’s time to pull the plug on this.”
Henry Ward: One of the investors that I was working on with the company who wanted to invest and gave me a term sheet. I can’t remember the exact numbers, but it was something like I could raise $750,000, and he would put in $500,000 of it, but I had to go get the other 250K to close. I remember being very excited. This investor, Menno, is a great investor, but said to me, “I don’t know anything about this idea. I don’t know anything about finance. It actually sounds like a terrible idea to me, but I like you. So, I’m going to bet on you, but you have to find other investors that will bet on the idea in order to close.” It was when I went through that process, I couldn’t find anybody else who would bet on the idea. The only person I can find who would bet on it was just betting on me saying, “I don’t really like this idea, but I’m going to give you some leash, some runway to try it.” I still wasn’t ready to fold when I couldn’t get that round done. I said, “Look. I’m going to give myself three more months at it. There are a couple of things I want to try to achieve, and if I can’t achieve those, then I’ll pull the plug.” That’s what allowed me to pull the plug was when I really set it up for myself that if I can’t do these things then I know I can’t get this done.
Alejandro: What were those things?
Henry Ward: I had to get some amount of usage. One was I had to get the round closed, and I couldn’t. So, that really kicked this off. Then I had to get some level of usage with a couple of partners that I was trying to get to buy in on the product. If I couldn’t get these partners to close and tell me they were going to use the product, then I felt I was just spinning wheels now. Just building product for the sake of building product.
Alejandro: Yeah. So, then what was that day where you finally pulled the plug. I mean, I think that entrepreneurship is tough, but ultimately from failures is where you really learn. So, what was that day like when this finally folded and what lessons did you take away with you?
Henry Ward: It was certainly depressing and hard. There was also a sense of relief, too, because I was grinding so hard at it for so long, for certainly a year and a half, plus, without seeming to get anywhere. There was a little bit of this relief of at least I know that it’s not going to work versus I still don’t know. But it was very hard, and I decided afterwards I was going to take three months and just do some contract work. Just try to feel productive. Even though I was productive the last year and a half, I didn’t really have much to show for it, so at least if I worked for somebody else as a contractor, I could build things for them and they would get value out of it even though nobody got value out of the previous year and a half of my life. So, I did that for about three or four months trying to figure out what to do next. It was over that three or four months that I just realized I had to try another company again. The idea of going and working for somebody else, for a company walking into somebody else’s company, I couldn’t imagine anymore. Not that it was a terrible thing, I just missed so much of the excitement of controlling your own destiny. You hunt your own food. You live and die by the decisions you make. You know, the market is compassionless. There’s no A for effort given by the market. So, it’s hard, but that’s what makes it exciting is you live entirely by your own wits. Once you have that bug of living by your own wits, it’s really hard to go back to safety and security.
Alejandro: Absolutely. But during these three or four months where you were doing contract work, and you were pulling yourself together again from having this experience, was there a breakthrough moment that you had where you were like, “Look, I had a first attempt at it, but it doesn’t matter. I’m going to try it again.”
Henry Ward: I think the breakthrough moment was the investor that I had worked with on the previous company that failed, I had kept in touch with him, and he had this idea. He said, “Henry, there’s an idea I have that I would love a company to be built around.” So, I caught up with him. We kept in touch after I closed the business, and I caught up him over lunch, and he pitched me this idea.
Alejandro: This is Manoj? This is Manoj Kumar?
Henry Ward: Yeah. Manoj Kumar. He pitched me this idea, and at first, I didn’t get excited about it. Over time, over a couple of months that I continued to think about it and talk with him about it, it became more and more exciting because it initially appeared to be a legal workflow document automation idea. But really underneath the hood, it was a financial infrastructure idea which is what I love is financial infrastructure. Once I saw that it was a financial infrastructure company and a problem, it became less like “I don’t want to go work for another company.” It became, “I want to go build this company.” That was the flip of the switch was when I realized what this idea meant. Then I dug back in. What was great about doing it on a second run was I had learned so much on the first run, spending a year and a half failing. I felt like to some extent, I kind of got all of the failures out of the way. So, I knew what not to do in the first 18 months of this company.
Alejandro: So then, let’s talk about that just one second. What were the top three things that you knew you were now going to do this time around?
Henry Ward: First was I needed help. I didn’t know how to build product well, and I really needed to learn how to build product well. So, I surrounded myself with other product founders that were very good at product. Manoj was very good at product. So, for me, I knew the skill set that I was missing out of the first one was product. I spent the first two years of eShares/Carta learning how to build product. I think now, I’m a very good product builder, but it took a lot of discipline and self-teaching to do that. The second one is to really understand what product/market fit looks like and how to make it happen. So, the first company, I built this product in imagination, and then just went to the market and said, “Here it is. Somebody should want this.” I really adopted lean, iterative product development where we—I was talking to customers before we even started writing code, and going to customers, showing them what we’re doing, coming back, redoing the product, going back to customers, and really tightening that loop up quickly. Then the third one is I understood much better now how to talk to investors. Talking to investors is a sales job, and understanding what they’re looking for, how they think about making investments, and then matching up the product strategy and business to what investors are looking for to finding investor/market fit, and company/market fit for investors. I think the fundraising process for entrepreneurs is a gauntlet. It’s a boot camp. It’s trial-by-fire, but I think it is that period of time that entrepreneurs are raising capital. It’s when they learn the most, and it is part of, I think, the necessary training that an entrepreneur has to go through to be successful is that fundraising process. It’s like the boot camp of entrepreneurship.
Alejandro: It makes sense. And it’s a good opportunity to cover some of the holes that maybe as a founder you’re not seeing. So, Henry, when you were in discussions with Manoj, walk us through how were these days when you took the idea, started taking it seriously, and what was that incubation process until you actually pulled the trigger on this?
Henry Ward: I would go back and forth with Manoj on how he thought about the idea, how I thought about the idea. Manoj was great in the sense that he gave me the nugget, the idea of why do we have these paper stock certificates in the private world, but they don’t exist in the public world? Then I took that and really looked at how public market infrastructure works and thought deeply about how to apply that into the private world. So, when the idea became exciting was Manoj wanted the problem of paper stock certificates solved. That was his itch but didn’t have a great view on how that problem gets fixed. Then my view was that paper certificate problem is a symptom of an underlying problem which is that there is no financial infrastructure in the private world. So, I had this idea of how to fix it. Manoj was great at saying, “Oh, that sounds great. That is a great way to look at solving this problem.” I was like, “This is a great problem for me to solve with the way that I want to solve problems.” So, once we had this plan, we really said, “Here’s the product that we can go to market with that we think will start solving this problem. If we were to solve this problem at maturity, so at scale, this problem with can we remove paper stock certificates from the world with this product? What would the world look like in that new era?” We could imagine both of those things really well, and that was enough to go, “Let’s pull the trigger.” Then the hard part of the company or the thing that we just have to figure out, and this is what company building is. How do you get from Point A to Point Z? That’s the unknown.
Alejandro: Right. So, then once you pulled the trigger, what were some of those early days like?
Henry Ward: It was a lot of writing code. It was a lot of recruiting, and it was a lot of talking to customers. I would say 3/4 of my time was building product and recruiting people to help me build product. Then 1/4 was talking to customers. It was just going back-and-forth every day, every week, building new stuff, talking to customers, trying to get them to use it, and then going back and building more stuff.
Alejandro: What were the first couple of critical hires that you onboarded for the business?
Henry Ward: The two critical hires were—I would say three. It was Josh, who became our Head of Product, and he came from a design background. Kyle, who was our first engineer, and Jarod, who was our second engineer. Once we got those three, plus me working on the product, that’s where we really started to get liftoff. That’s where the product started to really work. We got people to use it. Then we had our fourth engineer, Eric, who joined, who was one of the best engineers I ever worked with, who then really moved us into the “Hey, we now have this kind of product that people get to use to product that people get to pay for.” I remember the first payment we took, it took us a month. Stripe had just released their API. We’re trying to get Stripe working so we can take our first credit cards. This was when we officially launched in January 2014. The team worked the entire Christmas break trying to get payments working so we could take our first payments on the website and the signup flow. I remember on January 10th, a company in Austin, Texas paid us $120 to issue their first five or six stock certificates.
Henry Ward: Yeah, it was amazing. We were all crossing our fingers watching the Stripe output log to see if we’d actually get paid or not.
Alejandro: Wow. That’s really cool. As you were building the business, what were some of the main challenges that you experienced with a structure like this?
Henry Ward: You know, one of the things that we did which is maybe a little bit unique for us was, I felt very strongly in these small teams we had to work very closely together. We had a lot of young engineers. Our first engineer was straight out of college. So, we actually started doing every morning at 8:30 AM, everybody had to be in the office, and we would sit down and do—people call it a stand up. We call it a show-and-tell where every morning we’d come in for an hour, and everybody would show what they were working on. I would critique and give product feedback, and other people would provide feedback, but 8:30 AM meeting to 9:30, often people wouldn’t leave till noon because we’d find issues, we’d work on them together. Everybody had desks, but we probably spent more than half our day in a conference room with the entire company, seven or eight of us. All we would do is work side-by-side because as things needed to get fixed or things needed to get built, you could just look at the person next to you and do it. I remember those days as extremely intimate. Everybody was just crowded into a conference room working together in real time. We would meet every morning at 8:30 AM to start the day together. That permeated for many years. We don’t do it every day now; 500 people, but we still have our weekly show-and-tell on Wednesday mornings where the entire company logs in and people get to show what they’re working on.
Alejandro: Wow. 500 people. You guys have come a long, long way. And all 500 people are there in the Bay Area, or where are they located?
Henry Ward: We have seven offices. We have San Francisco, Palo Alto, Seattle, Salt Lake, New York, New Jersey, and Rio de Janeiro in Brazil.
Alejandro: Why Rio de Janeiro?
Henry Ward: About 15 people, we realized—I had a hard time raising money for this business as a tough, scrappy business. So, I was having a hard time competing for engineers in the Bay Area. So, I wanted to go offshore. I wanted to go somewhere else where I’d have a competitive edge. I wanted to stay within the same time zone, or pretty close, so I looked all over Central and South America. I looked in Mexico, Argentina, Peru, Ecuador, Columbia, and it just so happened that Brazil, for some government reasons, has a deep, deep bench of great Python and Ruby engineers. The government had taxed out proprietary software in the 2000s in tax.net out of the country. So, all of the universities taught Open Source, most of the government information systems were run on Open Source, so there was this great Open Source culture and training of engineers in Brazil. Once I found that out, we invested heavily in Brazil, and we now have 50 engineers in Brazil today, and we’ve probably moved 30 or 40 engineers out of Brazil into the United States who wanted to come up here.
Alejandro: That’s a great strategy. You’ve come a long way. Where you guys are at is remarkable and what you have accomplished. Looking back, we all know as founders that the highs are high and the lows are low. Was there, for example, with you guys a moment where you were like very concerned? Like you didn’t know if there was going to be a tomorrow?
Henry Ward: Yeah, certainly. Especially, in the early days, there was always the threat of—we were a week away from missing payroll on the balance sheet. There were times where we had a database breach which we thought would bring us down. There were all these episodes along the way. Even now, when you’re big, you think nothing terrible can happen to us. But history is littered with companies that even when they were doing well suddenly things went south. You just don’t know when something really bad happens what’s going to happen. It’s part of the excitement of being an entrepreneur, but it’s also the uncertainty. I think that’s when I go back to—I think fundraising is one of these exercises that’s so important for an entrepreneur to go through because it’s so hard and it’s so difficult to get people to invest. You hear so many noes, and it seems almost impossible for a lot of companies, especially for my company in the early days to raise capital. You just develop this over-confidence that you keep grinding away and things will work out. I think that’s the missing ingredient from a lot of founders is the persistence. The keeping going even when things aren’t going your way. That can go to a fault. I have met founders where persistence goes to stubbornness, and I think a lot of the art is knowing which is which.
Alejandro: I agree. I think that combining persistence, but then also with listening of why. Why are people saying no? Because, in my mind, I think that no is a request for further information to address certain concerns, and it’s just all in the follow-up. In your case, Henry, how many times did you hear the word no from investors?
Henry Ward: On the seed round, if you look at every angel investor, probably 60 to 70, and on the Series A, I had 30 venture funds before I got my first term sheet. Thirty venture funds said no. If you look at my first company, I probably had a couple hundred noes before I got my first yes.
Alejandro: Wow. I’m sure that you learned a lot. Walk us through the fundraising experience with Carta, because I believe you guys raised money quite early in the life cycle of the business.
Henry Ward: Yeah. We raised our seed rounds which got us going, 1.8 million. That was just the seed and angels. There was no significant institutional money in there. It was really an angel-party round. That was in the summer of 2013. We launched the product in January of 2014. Then we started getting enough traction. We went from January 2014, we made $700 that month. I think I told you the story about the first 140 bucks. Then by August or September, we were making about $50,000 a month.
Henry Ward: So, we went from $700 to $50,000 a month in six or nine months. Then that allowed us to raise the Series A, which was still very difficult for me to do. The biggest reason investors said no on the West Coast was they said, “Henry, it’s cap tables. How big a market can cap tables be?” I remember one investor saying, “You know, Henry, we like to invest in things where there’s line of sight to a billion dollars in revenue.” So, they were an investor in MongoDB. They said, “Look. MongoDB built a better database. All you have to do is prove you have a better database, and you can sell a database into a billion dollars of revenue-plus that you have line of sight. There’s no line of sight for you on cap tables. There’s no billion-dollar market on cap tables. That’s why we don’t like investing in companies like yours.” That’s why Series A was really hard. We were clearly getting some traction. Nobody believed that this could be a big business. They all called it a lifestyle business. It wasn’t until we went to New York that I met with three funds in New York, and all three gave me a term sheet. That’s one of the lessons I learned in the fundraising process is I think a lot of entrepreneurs feel like their job is to convince an investor that they should invest. I think it’s actually more your job is to find investors that get excited about your idea. If an investor isn’t excited about your idea, you’re not going to be able to convince them. I wouldn’t even say it’s worth trying to, especially at the early stage. What you want to do, finding investors is really a filtering exercise versus a convincing exercise. The mistake I made in the Series A was I spend all this time trying to convince Sand Hill Road investors that they could be interested in a capital market business where what I really should have done is just gone to New York because once I explained the business in New York, everybody there got it because they understood capital market infrastructure, and it was much easier once I was on the East Coast.
Alejandro: This is the round that was led by Union Square Ventures?
Henry Ward: That’s right.
Alejandro: Really, really cool. So then, I believe that right that year, something really interesting is that within literally months, you went from your A Round to your B Round. Why so quickly? Typically, people raise money for 18 to 24 months.
Henry Ward: Yeah. This was one of the clever things that I think both of us did, Andrew and me. Andrew was the investor that led the B. In the Series A, Union Square and Spark Capital where Andrew was were the two firms that were interested in investing. I ended up going with Union Square Ventures, but I really liked Andrew, and I said, “Why don’t you just stay involved. We’re raising 7 million dollars. Why don’t you put in 500K and just get to know us better? You are welcome to come to my board meetings as my guest and just hang out and learn about us. He was very gracious and invested 500K, and came to the board meetings, and got to know the team, and hung out at the office. So, I remember, I think it was in the April or May, maybe the May board meeting, I was walking through our metrics and numbers, and I said, “Look. I think I’m going to need more money pretty soon. We’re growing faster than expected, and I need to hire more.” That was it. Andrew called me a couple of days later and said, “Hey, you remember how you said you might need some more money soon?” I said, “Yeah.” He goes, “Well, I have some if you’d like it.” He offered me a term sheet. I think it was on a Friday. Then by Saturday night, we had signed it and closed the following week. That’s the fastest, easiest round I’ve ever raised.
Alejandro: Absolutely cool, and that was Spark Capital?
Henry Ward: Yeah.
Alejandro: That’s really, really cool. Now, Henry, how much capital have you guys raised?
Henry Ward: In total, we’ve raised about 150 million.
Alejandro: 150 million, and the last one was the Series D from December 2018. Right?
Henry Ward: Yes. Actually, about 200. Sorry, about 150 million and the last one was a Series D of 80 million dollars.
Alejandro: Got it. The investors, just for the listeners, you have SV Angel, DFJ, Menlo, Kima Ventures, Spark, Union Square Ventures, you have Draper as well, Anthony’s Group. It’s like the Who’s Who. What was typically from your experience like to really getting those investors in? I think that getting into their circle of trust is critical because early stage investing and investing privately-held companies is all about trusting whoever is leading the charge. What were the most effective introductions that you got, and what was the process to build that trust?
Henry Ward: You know, in the early days, having angel investors that are passionate, and get excited about your company, they’ll help syndicate, and they’ll help pull in their friends and people that they co-invest with. Once you get in the institutional rounds, once you have a Union Square Ventures, a Spark, a Menlo, a Meritech, once you have an institutional lead that’s in, and the company’s doing well, the rest of that stuff just gets completely filled out. It’s one of these things that entrepreneurs who raise capital should realize. Fundraising is hard, hard, hard, hard, hard, and then suddenly once you get a lead investor, it gets very, very easy because it hits its tipping point where once somebody else jumps in, everybody else wants to jump in after. The reason is that—it makes total sense; it’s a game theory problem. If you’re an investor, the last dollar in is the safest dollar into a round because you have the most information. Before anyone invests, everybody has the same information about the company. They’re trying to evaluate the company, but once an investor comes in and says, “I’m in for 10 million dollars.” Now, everybody else knows that this company will have 10 million dollars, which makes the company more valuable and de-risks it because they know that the company has 10 million dollars, and they also know that this investor has some conviction around it and may know something the others don’t. Then they can call that investor and find out. What happens is, once you get the first check, every subsequent check becomes easier. Once you get the second check, the third check’s easier. Once you get the third, the fourth is, and there’s this trickle effect. So, what happens, in my seed round, it took me three or four months to get the first check, the first 500K in. Then the last 500K took me about five days.
Henry Ward: It just accelerates really quickly. Once you get the first investor in, the rest of it, you don’t even need introductions. Everyone just starts calling you saying, “Can I invest?”
Alejandro: That’s amazing.
Henry Ward: “I heard Meritech’s investing. Can I invest too?” As a founder, you always want to be like, “Well, where were you before Meritech showed up?” That’s always the game to play.
Alejandro: I hear you. Yeah, I always tell founders that unfortunately, the way this works is that for investors, time is their best friend, and for founders, time is their worst enemy because for the founder, obviously, you’re always about runway, while for the investor, you’re always about execution, and time is going to give you more access to that. So, I fully agree as well on what you’re saying, Henry. So, for example, in this case, what I wanted to ask you is was there a time where you actually were like, “I think we’re into something really big here.”
Henry Ward: I think when we went to the Series C, we knew we had a good software business that was growing. I think we went to the Series D. We started believing we had something really special. It went from a good software B2B SaaS business to a business that could be an outlier business but has the potential to be one of this decade’s generational companies. I think that happened over the last 12 months.
Alejandro: Got it, and one of the things that you—I mean, we were talking about challenges earlier, but one of the biggest challenges is rebranding. I remember when you guys were called eShares. So, what really triggered the change of name from eShares to Carta. What was the big challenge there on doing the rebrand?
Henry Ward: Sure. It was two things. So, the first thing was a very practical one. We had eSharesinc.com. eShares.com was being held by a squatter. Every time we asked to buy it, he would raise the price. He was doing pretty awful things like putting a copy or making his website on eShares.com look like our website so that people would get confused and things like that to try to force our hand. So, we realized we were negotiating with terrorist because at first, he would say it was $200,000 when we didn’t have that much money. Then we’d raise money, and he’d see the news. Then it would be a million dollars. Then it would be 10 million dollars. So, we knew we would never really be able to buy it reasonably from him. So, that forced us to change the name. But the other thing was that we also realized as the company was growing that we were outgrowing the name eShares. There was much more on our roadmap beyond just electronic shares. So, we decided we wanted to search for a more emotive name, a name that could cover more territory, more area for us. So, we hired a naming consultant—an inexpensive one, but she was great. We did a whole branding exercise to try to figure out what our company values are, what our brand is, and that would inform the names that we would choose. So, our naming consultant gave us a bunch of names. We had all our employees submit names, and then we would go through this branding exercise and start filtering out names. We got to a core of ten names that we felt fit into our brand, and then we had employees vote, and then the board vote, and then a small group of me and the early employees vote. What was exciting about it was in all the hundreds of names that were available to us, all three groups, independently, picked Carta as the name. Everybody picked Carta, without knowing what the other people were doing. It was completely independent. Then we looked at Carta, and it was a domain that we could actually buy. I think we paid 100K for it or something. So, it just became destiny, and Carta became our name. So, we got very lucky in how all of that worked. It actually was a really great exercise for us.
Alejandro: And what a great name. I love the name, Carta. So, you guys are the leaders when it comes to managing cap tables. I think that cap tables is one of the biggest things because I remember Reid Hoffman said that whenever you’re raising money, you need to always focus on how your next round is going to be like, and getting someone in your cap table, it’s just going to be harder to divorce them than divorcing your husband or wife. So, what are some of the biggest lessons that you’ve learned on cap tables that perhaps you can share with our listeners?
Henry Ward: I think there’s one administrative thing. It’s usually cap tables are wrong, which is why we created this company to make that go away. The other thing about cap tables is I think they are very symmetrical information. I think investors know a lot about cap tables, how cap tables work. I think early founders don’t, and so there’s no sense of “Hey, what’s a reasonable price? How much dilution should I take for a certain amount of money? What are the rights and preferences that go along with this cap table? If I’m giving away part of this cap table, does that mean they get information rights? Does that mean they get rights to be on the board?” There are a lot of intricacies around these transactions that affect cap tables that I think a lot of early founders, including myself, don’t completely understand. Unfortunately, not all investors are the most transparent and open about explaining that also, and lawyers get involved and create all these nonstandard terms, too, which make it even more complicated. So, I think there’s a lot of nuance and structure that fits around these cap tables that are poorly understood. Then the last one, I think there’s also this information asymmetry between employees and the cap table where I can see and look at employees across—just like I can look at the entire payroll file, I can also look across at all of the option grants across employees. But an employee, a prospect, a candidate that’s coming to work here has no information about what’s a good option grant to offer or not. It’s very hard to get market information on that. I think one of the challenges around the cap tables, it is so important for companies that do well—the difference between a 20% change in somebody’s salary, might be 10, or 20, or $30,000, but the difference in a 20% change in the option grant could be millions for the right company. So, I think there’s this unfortunate way that employees don’t really understand how their equity works and what comparables should be, so really have a hard time valuing it.
Alejandro: Got it. One thing that I was present to when you were explaining this is in terms of management of equity, what’s typically the most common mistake that you see founders making?
Henry Ward: Well, the number one mistake we find is that founders forget that they issued a convertible debt. They literally just don’t record it. Then when it converts, they forget about this liability, and it comes back later to bite them. The other mistake is when they do convert convertible notes, the calculation of the conversion price is often wrong, which makes their liquidation preference and waterfall go wrong. So, most of the mistakes we see are in the debt to equity conversions. We also see where this is less a mistake, but I think founders just aren’t well-tuned into it is some of the not-best investors will put in extra preferences like participation rights or dividends. Things like that, that founders just don’t understand or know about. I think that’s not a mistake as much as sometimes founders are taken advantage of that way.
Alejandro: Right. One of the things that I wanted to ask you here is one question that I always ask our guests. You’ve done it all. You’ve been in a company that worked, a company that didn’t work, and you’ve obviously done almost the full cycle. The last thing, obviously pending is the exit on this one, but you’ve done pretty much everything here. Knowing what you know now if you had the chance to give your younger self one piece of advice before launching a business, what would that be and why?
Henry Ward: I would spend a lot more time thinking about and vetting an idea before jumping into it. But then once I did jump into it, once I did all the upfront homework to decide if this is the right idea to go in with lots of conviction.
Alejandro: Got it. And in the presence of vetting, any type of tips?
Henry Ward: I think you have to spend a lot of time talking to customers or potential customers, and also talking to investors, and really starting to define and refine the business model, the customer acquisition strategy, the business model, the defensibility, the network effect. I have my five things that have to be true, and I do this today because we launch new products all the time, so I have my checklist of five things that we have to have conviction around before we go launch this new product into a new market. We do a lot of the upfront homework. Once we agree we have a lot of conviction about this, we really put some muscle behind it because even great ideas can take a lot of effort to get off the ground.
Alejandro: Right, and talking about Carta, what I wanted to ask you also is what does the world look like when the vision, let’s say in some years from now of Carta is fully realized?
Henry Ward: I think there will not be a significant difference between being private and public; that there won’t be this arbitrary IPO line where you observe liquidity as a private company and hyper-liquidity as a public company. I think the line between private and public will blur, and I think more and more retail investors will have access to private companies that they don’t have access to today.
Alejandro: I love it. So, Henry, what is the best way for folks that are listening to reach out and say hi?
Henry Ward: My Twitter handles is @henrysward.
Alejandro: Amazing. Well, Henry, thank you so much for being on the DealMakers show today.
Henry Ward: Thanks so much, Alejandro. This is great.