Charly Kevers, CFO at Carta, on progressive price discovery and investor relations

But in many cases, that's your structure through control for agreeing on the price. One reason people like it is because as an issuer, you have control over the price. Like you decide I'm doing a transaction at this price, I'm comfortable with it. And move forward and offer that up to your existing shareholders.

So that's why it's been, as far as we can do in Carta, the default  for many people , and in many cases, it's allowed people to work through without too much uncertainty. So that I think would be the big aspect. I think the downside is there's still quite a bit of complexity on the tax implications because the company is quite involved. Same thing with the accounting implications. So  still have to be quite thoughtful how you set it up. And because there's involvement  from the company, it's really tricky  to be able to say  it's capital gains versus compensation.

So that's generally where it gets a little more complex in there. And there's definitely some downsides where you may not be able to get the best tax treatment for your shareholders, your employees in particular , because I'm sure you're aware that the more involved the company is, the more it looks like compensation.

And so that generally is -- and the tax rate is a bit different, especially if you live in California -- so that is absolutely something that is a downside of tender offers.

Stepping a little bit back from that,  early stage founders and CEOs often might have the mentality that they're not -- employee or early investor liquidity is not necessarily on their mind , and they could see it as a distraction.  At what point does it become something that becomes top of mind for an early stage founder? When should they start thinking about  tender offers as a liquidity solution?

I think it absolutely varies with the level of maturity of your company.

I think to me, when you start to see people think about it and it will really -- I don't think there's one kind of unique framework. It's when you start to compete with talent that is looking at alternatives where part of their compensation is liquid stock, and once you start to go after people at public companies or later stage private companies that have some access to liquidity, that's when you almost don't have a choice and the market today is still quite competitive for the best talent.

And this is becoming a real discussion, just like it was way back where it was even like, wow, you need to give equity.  A few decades back, equity wasn't as common for everybody. That started the discussion on -- of course it starts with engineers, which is  always the most  competitive role to bring on board, and then expanded to all the business roles.

And I think we're starting to see a similar trend on, well, it's great that you are giving me equity, but  how do I monetize it? And that's the same discussion now that I think is forcing a lot of founders to think, okay, how do I do this? And I think it will hit you at different points in your maturity level, but  generally when we see people  get there is like series C and beyond .

That's what tends to be more common, but I actually suspect they will start to happen earlier and earlier as competition for talent continues to happen.  

The one thing I'd add too --  I forgot to mention on the downsides of a tender -- it's quite a bit of a work on disclosures and risk factors, and so it's a pretty heavy burden every time you do it. There's a lot of legal work to put this in place. So the time constraint and the investment in that, every time you do it is significant. 

And then there's another aspect I don't think  a lot of people appreciate is oftentimes these tender offers settle seven to 10 days later, which can create really interesting issues where certain people will actually owe taxes once the trade clears and therefore will owe taxes before they actually get the money.

And so, in these structures, of course, it's not for the vast majority of employees, but the current structure that is used has some of these drawbacks for bigger sellers, for example, and it can be early employees who are getting a million plus kind of payouts and that's a real issue.

They generally don't sit on the tens or hundreds of thousands of dollars of taxes they owe. And then how do you deal with that? It's just, there's a lot of these very specific issues, but that are real for employees, that are some of the other challenges tender offers show.

So at what point should companies start thinking then about programmatic liquidity through something like CartaX? Do you think of it as the next stage beyond tender offers  and how does the mindset shift to being like, I need something like CartaX?

To me, it comes back to where are you in your level of maturity?  How do you think about your company longterm? Do you want to go public or not?

And to me it's a continuum, right? There will always be a reason for companies to go public. I personally don't think you necessarily will be like, people stay private forever. People will have the tool where people can potentially do that, but I think in many cases over time, it does make sense to have access to that level of liquidity. At the same time today, there's this big middle ground. It's like white space. You've got just complete non-liquid, these episodic  liquidityr events around tender offers for the most part, and then the IPO, or the exit.

And there's nothing in between. You just don't have a lot of tools as a CFO to be like, okay, how do I find the right structure to provide incentives to my employees that are appealing to them and that retain them. And what tools do I have to also evolve my cap table over time outside of primary rounds.  Today, outside of doing, having a more regular secondary program, I don't have a lot of ability to move my cap table or it's a lot of lift. Outside of doing primary rounds and again  bringing new investors on board, but at some point that has dilution impact on myself, on existing investors. I need to keep that in mind and so it -- but I think there is work to be done as you get closer to being public.

If that's your eventual path, how do you bring those right investors on board before your IPO, so you get the right participants already on your cap table to support you as a public company. All  the crossover funds that are very helpful in prepping you for that, they oftentimes want to get to know the management team ahead of going public.

And it's important to have those large holders who tend to be longterm holders as well, there to support the stock, there to support the management team through that. And if the only way to do this is through a primary, it limits your options. You can always do it, but I think this gives you another tool to manage that transition of your cap table.

And again, I don't think it's like a fine, a bright line  at that point.  That said, like your series C now it's done, but think about it. It completely depends, different companies move at a different pace in terms of how quickly they are "public ready" if you will. So to me, it's just providing, thinking through that continuity and where you're at in your life cycle.

We're a company that, we've been around for a while and we still have a lot to build, that I don't think we'll rush to go public or anything like that because we just, we're not ready yet to have a  super clean story. And that is still a lot of investment, still a lot of movement in what we do.

And so it really depends on each company. But to me it's more about having more and more tools to go do what you need to do.

Got it. For Carta specifically, then, can you talk a little bit about your goals for the upcoming cross and how you're using those tools strategically?

Yeah, for sure. Look, for us, it does start with talent. That's very much how we started thinking about this and what we hear from most of our customers. We're example, number one, right? We are every day competing for talent that comes back and says, yeah, this is great, that public company is giving me this in equity. And of course, it's a mix of how liquid or not, what's the upside, all these discussions, but the liquidity impact, especially in a more uncertain environment like we live today.  It was just, who knows. There's a lot of things that are still left unknown. I think the pressure is higher to give people some level of comfort that they can access monetization on those shares. And so that is still a big driver for us. specifically for us, there's also a component of let's go test all this, We know we'll have to evolve while things work over time.

I think we've got a good understanding of the structure that we want to put in place. We've talked to a lot of investors and issuers. But there's no other way to just really go validate as then going and doing it. And what's unique to us is that we want to be the first to really set the stage and hopefully be an example to everybody else on how this can be helpful.

I didn't, we are, we're also at a stage where I want more options on what I can do with the cap structure. That means -- my background's in M&A, we've done M&A deals in the past, we will do more. Having a liquid stock is real currency. It gives me a lot more tools to go some, make progress on some of these strategic initiatives, versus I've got a private stock.

Yeah, it has a lot of value, great opportunity that we have ahead of us, but it's very different when I can say yes, and then here are all these liquidity events, very predictable -- just very different. So to me, it's just about creating the right tool set for us as a management team. And then for our employees, starting to give them predictability around us, and giving them a way to manage their financial lives. Where -- because when you do the tender offer, it's who knows when, right? Like, we have committed, we do it every 12 to 18 months, which we've done, but every 12 to 18 months, it's pretty broad. Like, when does it happen?

It's very different to go to an employee and say,  look, we're going to go every quarter and therefore there's no rush or there isn't a push. You're not your back against the wall.  Like, this is your time to trade. We're not quite sure when the next time is. Now you have a way to think and plan your financial life based on that predictability.

And that's really what we're targeting.

That makes sense. Can you talk a little bit about how price fits into all that? One of the criticisms that you hear about tender offers is that employees often pass on them, because employees, if they're very bullish about the company, can have very high price expectations. And one of the things about programmatic liquidity through CartaX is that there's a competitive auction mechanic and bidding process. Can you talk a little bit about price from the employee perspective and also about the process of price discovery and how that could be a potential competitive advantage and a tool for the CFO to use?

Yeah, for sure.  That's the challenge with episodic liquidity, right? Because generally, it's going to be tied to a specific -- generally to a primary, even if it doesn't happen right after the primary, let's say, a few months later, but that's your reference price. And if the company is growing insanely or doing really well, you know that by the time you transact, the price should be higher.

And so that's generally the mindset of the employees and they see fairly what's happening. They know the opportunity, and i\they generally are trading on all the information already. And that's why you have this discrepancy. That's why we're so excited about having more of a market driven price discovery mechanism, where employees can now -- here's what I'm comfortable doing. And again, the predictable and recurrent nature of it also drives different behavior, right? Because when it's your one shot, you're going to get more aggressive.  Look, I need to maximize, this is it. If you're able to tell people, look, every quarter, you'll be able to have access to it, then people can also have different price points at which they're willing to liquidate parts of their stock. So I think it just enables everybody to find a good way to access liquidity more gradually, which makes for more orderly  transactions, I think.

And it gives us such a powerful tool for me to just not know here, this is what the stock is worth.  Going back to M&A, I can point to, look, this is where it traded. Like I'm not just making this up where it wasn't like a deal done two years ago, where that's the last price point I have, and I know by now it's more valuable, but I have nothing to tie it to. That helps me. Same thing for recruiting. Now I can point to something and say, yes, this is what the market is valuing the company on. And so there's a lot of benefits from that standpoint that I think come with that.

And then I think generally from a cash structure standpoint, with having more liquid stock and a market driven price, I think it also helps with other aspects of your cash structure, where, let's say you take some debt, with some warrants attached, it's very different to say, hey, I'm not quite sure what the warrants are and again, tie to a really old round. Now you can, again, tie it to the most accurate and recent picture of what the company's worth, which generally should decrease your cost of capital. So I think there's a lot of little things like that -- today aren't available as tools, but I'm looking forward to have as a CFO, and this all starts with market pricing.

One of the things that we keep coming back to is the value of an increased cadence for liquidity events. In talking to the CartaX team, one of the things that seems potentially exciting or interesting is this idea that maybe the cadence could be even daily. We're talking about from  something that happens quarterly to every 12 to 18 months , to potentially something that happens even monthly, weekly or daily. Can you talk about what might drive increase of cadence to that level of frequency, and how you're thinking about it?

Yeah, I think it's really once you get a better sense of supply and demand and what makes sense. Because I don't think you want just every transaction, in itself being like too, too massive. It's almost kind of, you want regular auction mechanics to actually really understand what the price is, instead of really almost having pent up demand and -- arguably maybe drives better price outcomes, don't know. But I think for us, quarterly, we think makes sense, and we have a sense of how much we want to drive every quarter.

So again, I think it's just about giving additional tools to the company. I don't think that again there is one way to approach it. But it gives you now the ability to say, hey, based on the behavior I'm seeing, based on what I'm competing with -- and again, as you get more and more mature and you compete increasingly for talent that has access to public companies, you may have to provide more regular liquidity.

So to me, it's a bit of a, kind of depends what market you're evolving. I don't think there's any pressure that says, hey, at this point, you need to do it weekly. But it's just having the tool that enables you to make that choice. So that's the huge difference.  In the public markets, I don't have a choice. My stock is trading every microsecond and anything that happens, it's going to start moving around, and it has its own downsides too. I've been mostly at public companies, and I can tell you as an employee of a public company, the moment the stock moves, it distracts everybody. So there's also that, right?

You probably don't want to go too fast to trading all the time. Because then everybody pays attention to that. This is whatever you say. People will look at it, people will pay attention to it. And so I love that it just enables you to gradually get there and gradually educate everybody to what it means to have a market driven price.

And then in certain cases you may bring it back to, okay, we'll go with every six months because whatever the dynamics are. But now you have the control. Now you have the ability to have to do what's right for your company. And I think that's the big change, is it's not here where it's once in a while and then we'll see, and now it's like all the time. It's again about bringing more flexibility and putting the issuer back in control over what makes sense for them.

With this kind of issuer-centric model, some of the pushback that I've heard is that marketplaces are driven by demand, and if we make it too issuer-centric, it will be too illiquid, really we should be focusing on the demand side and what investors want. How do you think about a marketplace in which issuers continue to be in such control over stuff like frequency, cadence, and how that could ever transition to a more public markets model, where there's actually free trading and that kind of thing?

Yeah. So, absolutely we want to make it issuer-centric because part of the problem we're trying to solve is, today, it's not, and everything that happens, it's outside of their control and that's what's driving them nuts. And so that's why that's the framework.

It doesn't mean go do whatever you want, change it all the time, because we have to be clear with them. And then, don't expect investors to be there all the time. So I think it is finding the right middle ground where just as you want to provide employees some sense of predictability, it's exactly the same thing for investors.

The public markets are no different. They want to know how often they'll get information. They want to know how often they'll talk to you. They're also creatures of habit. There needs to be some cadence to it. And so if you keep changing this all the time, don't expect a lot of liquidity in your stock because people won't show up.

So I think it's on us to drive this level of education, but I agree that you can't just say it's all the issuers and then investors deal with it. Of course not. It's about finding this middle ground. And I think a lot of CFOs get that. I haven't talked to one that's, I'll do whatever I want and then people just have to deal with it. They get it. They've all dealt with investors. They all have investors on their cap table. They know that you need to be clear about what they can expect in terms of what you communicate, how you'll communicate it, how often they should be looking at your stock.

And if that isn't there, they won't show up. Our objective is to actually help the issuers set a program in place that makes sense for investors. And that makes sense for the right investors to just be constantly there to be active in some of the names that we'll have trading early on.

When you start doing programmatic liquidity, you're setting certain expectations and, as a result, potentially ramping up some amount of administrative overhead and investor relations function. Can you talk about how you see the relationship between pre-IPO companies and even earlier stage companies changing with how they do investor relations and how they think about that?

I think that is probably one of the bigger changes, it forces you to think a little more, a little harder about, what does it mean to engage more regularly with investors and new investors? I personally really enjoy it, and I think it's just so valuable to constantly get. Of course that I did that before for public companies, so a bit of a unique spot where I know what it looks like when you do it for a large public company that a lot of investors own. But I see so much value in getting that market feedback regularly. Because especially, again, it's what I really find attractive is how it gives you this continuum.

And now, again, I'm not thrown in the wild where, oh my God, this quarterly reporting and guidance and, oh, what do I do? And then it's a lot of lift if you've never done this. What we're saying is, just start and get comfortable with it. And again, you're in control of how often you want to do this, how you want to engage with investors. There will be a minimum you will be required to do because that's what's expected from investors to make sure that they can engage.

But I think it allows you, like, start every six months. And that's not too heavy. And honestly, if you're doing your job as a CFO, you're probably talking to investors already. Most of them are, but this is more -- to your point, you're probably putting a little more of your team's focus on, okay, what's the right reporting. And in many cases, for us, the reporting would be exactly what we do internally, and just now make sure the timing is always very consistent, but the packaging will be a little different, but the information we already create. We have board meetings like everybody else, and so we're not creating anything additional to what we're doing today. It's just now where we know it's going to go through a different set of stakeholders. For me, it's carving out time to engage with those new investors and educate them on Carta and what we're about. And I think, frankly, for any company in the later stages who even remotely thinks about going public. Is this healthy, is it healthy to do? And, frankly, I think, something that we don't talk a ton about, but having that scrutiny is great from a governance standpoint, too. Every quarter, every six months, you need to talk about your performance and what you're doing, and having investors holding you accountable, even the ones that aren't even holders, but say, hey, you told me this six months ago.

It's great. I think it's talk about having a little more oversight. I think it's healthy. It puts a little more pressure on later stage companies. So again, it's not, I'm going to look to the extreme and you don't find yourself with a WeWork with, oh my God, wait, what is this?

And by the time it goes public, everything is different. It allows you to ramp up the level of scrutiny, which I think is really healthy. And again, by the time you're public, you're like, okay, yeah, I've been doing this for two, three years, four years. And now it's just this is the last step.

So I'm personally a big fan of that aspect too, because I think it's just allows companies to mature at their pace. And again, it comes back to you, you're in control on how you want to mature that aspect of your business. While in the past, you didn't have that control. It was either this or that.

And then good luck and get ready. But you don't really know what it's going to look like once you go public.

Can you talk about -- in opening things up to outside investors, you get an additional form of market discipline, but that comes at the cost of doing more disclosures, and many people might think, I'm private for the very reason that I don't have to make these disclosures, and all the stuff you've talked about, employee liquidity is great, it helps me hire better, but one of the biggest focuses for me, for my competitive advantage, is not having to tell people what I'm doing and ultimately not having to be accountable to investors. Can you address that type of pushback?

It does come back to, it's nice to want your cake and eat it. It's a bit bad, right?  That's fine. If that's really critical for you, I 100% respect that. And there are many cases where it will make sense for them not to disclose and to stay pretty quiet.

That means you're going to have to access the capital markets in a different way, too. That probably means you're going to rely mostly on primaries and do secondaries very, maybe once a year, and then be very targeted on how you bring in. Again, the way we think about it is the issuer will have control over who sees it.

We're not saying that information is just blasted to the market. Again, that's the public markets and that is because every individual, anybody could have access to it, by definition you need that information communicated to all potential buyers. Same thing for us, except you have an ability to effectively create your own market. And so, I think even in that case where you're concerned about sharing information too broadly, which many product companies think through -- I think that's, by the way, getting better. I see a lot more people being comfortable with, look, I get that I need to share some information to have access to liquidity. I don't think there's a ton of debate on that. But I think given we effectively allow you to select which investors will have access to your market, that then gives you comfort, like I'm only working with the top tier of institutions, and then it's only going to the top funds and not folks you don't know, or folks you've never interacted with. That's how I think we  get a lot of the issuers more comfortable, like it's still a structure where you can drive controlled disclosures. The disclosure will be, what will be to some minimum disclosures people need to go through, but again, it's not blasted throughout the world. And so I think the risk of it becoming an issue from a confidentiality standpoint is much reduced.

Yeah. One of the things that is interesting about the auction dynamic is that I, as an employee, maybe haven't necessarily participated in an auction of this sort. And so, one of the things we talked about with tender offers is that there's a process of disclosures and making sure that all the employees are educated on the tender. Do you think that burden becomes even higher in a situation like this, where an individual might be selling a large chunk of shares and maybe needs to have some advice on how to game theory the auction process? And also for institutional investors, like maybe family offices or something like that, who may not have participated in this sort of thing?

I think for institutional investors, even family offices and smaller ones, they've all been participating through a lot of different forms of transactions. That's generally, I don't see any issue there. And they're professional investors that think through ins and outs in their portfolio. For employees, honestly, I don't think that's different between any type of liquidity events, because no matter what, it will likely be something relatively meaningful to you, and you will have to think through some level of financial planning. And whether it's managing the tax implication and, no matter what it is, I don't think this actually makes it any more complicated. I think the difference is now it's a little more predictable. It's actually better, because versus the tender offer structure or even again an exit -- certainly it happens, and then generally people never take this seriously until it happens and generally too late. What's great about a program like this, it forces you to be like, okay, now I know this is coming and I don't necessarily need to take an action now, you're a little more incentivized to go, okay, let me think about what it means for me and how I deploy that equity over time.

And now yes, should I go see an advisor. It's up to them. We'll do a lot of education and we'll support  our issuers to make sure  employees  understand all the basics around tax treatment in particular, but I think it actually helps them be aware of it and think through it, versus boom, suddenly a transaction happens and now I'm caught flat footed, I haven't done all the right things I should have done in terms of exercising and thinking through all my tax prep. This is better because it pushes you a little bit as an employee to be like, oh, okay, yeah, I should think about what it means for me. And there's a lot of tools we can give people on just here's some math that you should do based on the equity you have, what type of equity, to quickly understand what the likely implications are and to give them enough tools to then have the right discussions with advisors and others that can help them.

We touched on this a little bit, but I'd love to hear your thoughts longterm about the potential for companies to stay private and not go public. One of the things that keeps coming up today is the value of price discovery for companies that are going to go direct listing, but one of the things that we talked about in our report is the privately traded company, the company that gets a competitive advantage from being both private and liquid. Can you talk about how you see things longterm with public versus private and an IPO?

Yeah. it's interesting.  I think there's a use for all of it. Meaning, being totally private and for some time not allowing too much movement, at least not too early.

So you can just focus on what you have to do and not have people worry about how they monetize. Then a lot of people do gradually get more and more liquidity. And then eventually go public. There are some benefits. It's pretty painful administratively for sure. But there are benefits in being public.

And it depends what market you're in. And again, I think it's so depending on the company, right? If you are a company that needs the visibility, that needs consumer recognition, whatever it may be, being public may be the right answer for you. But I think if you're in a niche market, where you don't need a lot of visibility and you can operate that way, potentially it makes sense to me. I think, again, it comes back to what I was mentioning earlier, it's just like another tool for you to manage that life cycle. And as you mentioned, that's a really important point, like ahead of the direct listing. This is a perfect tool to go do that. Now you have a perfect tool. You can actually accelerate transactions over time and really get a better sense as you approach the direct list of what's your market price, and then try to price it as accurately as you can ahead of a direct list is really attractive. And so, I think it's more just this continuum and we see ourselves solving a gap right now that's not solved consistently and at scale. And so I don't think it's, well, everybody's going to stay private now. It's so dependent on what your objectives are as a company. That -- for some people it makes sense, for others, it may not. We just want to be able to provide people more options.

I really appreciate you taking the time to chat with us. It was a really fascinating conversation, and exciting time to see how this all evolves.

Thank you.

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