It is an odd artifact of history that private markets have zero liquidity, public markets have hyper-liquidity, and there is nothing in between. This illiquidity in private markets has created three problems.

Employees live poorer

Startup employees take lower salaries in exchange for equity. Today, the only path to liquidity is IPO or acquisition for which 99% of startup employees never see. For the overwhelming majority of startup employees, the equity lottery ticket is never redeemed and their paper wealth never converts to real wealth.

For the lucky few employees to work for a company on the path to IPO, it can take so long (sometimes a decade or more), that pay cuts for equity are not worth it. Founders and venture investors don’t have this problem. Founders often negotiate personal liquidity into their financing rounds and investors are paid a generous 2% in annual fees for the lifetime of their fund. It is only employees that have to sacrifice for their lottery ticket.

Seed capital is more expensive

Early stage capital is expensive partly because of principal risk — investors are likely to lose their investment because most startups go to zero. But it is also expensive because of duration risk — the winners can take a decade or more to achieve liquidity. Angel and seed investors tie up their money for years before they get it back. When the alternative to private market investing is public market investing, where money can be invested and returned within seconds, the number of investors who willingly lockup capital for years in early stage startups is small. That’s why they are called angel investors. Only an angel would do it.

A more efficient capital market would be one with shorter duration. Imagine seed investors who could invest in the earliest stages of a pre-revenue startup, and then after the company finds product-market-fit and starts scaling, they can sell their stake to growth investors, and recycle that cash back into early stage pre-revenue companies, they could specialize in what they do best which is early stage investing.

They would only have to hold positions for 2–3 years, instead of ten, and could recycle their cash back into early stage startups. That would reduce the duration risk for seed investors, increase the supply of capital (I would do more angel investing if I didn’t have to hold for ten years), and reduce the cost of capital for entrepreneurs.

Late stage private companies lose talent to public companies

Late stage startups are in a talent trap. They are no longer recruiting risk-taking employees who want to join an early startup for its potential. Instead they are competing with public companies. For employees choosing between a public company or a private one, the late stage private company is the worst of both worlds. They no longer have the growth potential of early stage private companies, but they don’t have the liquidity of public companies either.

If private companies could offer cash, stock, and liquidity, they would win the talent wars with public companies because they could offer the best of both worlds — private company growth curves with public-like liquidity. That lottery ticket startup employees sacrificed for will finally turn from paper wealth to real wealth.

Introducing CartaX

That is why we built CartaX, our private stock exchange. CartaX is different from secondary marketplaces in that it is a listing venue akin to NYSE or Nasdaq. That means the issuer is our customer and we build a market for that issuer’s stock with those issuer’s rules. It also means that all issuers will have to meet our listing requirements.

Carta will be the first issuer listing on CartaX in January 2021. We will announce the next cohort of issuers after the first listing.

For Carta employees, and employees of our first cohort of listed companies, liquidity is coming.

Listing positions are booked by companies through March of 2021, but if you would like to list on CartaX contact listings@cartacapitalmarkets.com.

CEO at Carta

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