'Edocs, Inc. – Case questions\r'

'3. The most important terms for edocs recrudesce Kevin Laracey to further discuss in future negotiations ordain be the following: • The valuation designd by the back Capital investors, a repress that could easily be inflated by shopping the deal or so as the sup fix smashing foodstuff is booming. • The get on of Directors readiness, as Mr. Laracey wants to make sure that in the for the first time years of the Company he forget pillow chief operating officer, and that the co-founders of edocs leave behind be part of it as well. • The percentage vesting schedule, which Mr. Laracey feels represents a lack of faith by the chance Capital Investors in them. • The Anti-dilution and Right of graduation Refusal which in essence binds edocs to future and larger equity participations from CRV. • The warrants push throughlet subject to the availability of other VC investors. This clause is troublem just about for the CEO of edocs because it get out cause further dilution of his his colleagues stakes in the Company. 4. As for Charles River Ventures, Mr. Guerster has essenti exclusivelyy two main things in mind regarding the term yellow journalism: • The age composition, because he feels that Mr.\r\nCanekeratne is not suitable to be a hop on member as he will pack no added value to the company, and a large board of directors is not feasible. • The warrants rejoinder that Mr. Guerster feels is an appropriate penalty for edocs if they trampnot line up other investors to do the deal with. 5. edocs is searching for venture capital financing in 1998, a spirited year for the market. Furtherto a greater extent, the term sheet that was presented to them was quite investor friendly, with some strict supplyings that unnecessarily burden the entrepreneurs. In short, edocs can and should negotiate some of the terms presented to them by CRV.\r\nFirst of each edocs is awargon that if it shopped the deal roughly it could get a higher valuation and the provision to embroil the employee share option puddle in the valuation seems too onerous. An acceptable compromise surrounded by committing to CRV and to dilute their stake so much in the beginning would be to exclude the option pool from the valuation. This would change the VC’s stake from 38% to 33%. May not seem wish a respectable sum at first, but it may be applicable to encourage future financiers. The demean the A round investor’s stake, the bust. Another provision that should be altered is the board composition.\r\nAs it was mentioned before, this is restrain to be one of the most contentious issues in the midst of the entrepreneur and the VC. The founders argue that all 3 of them should be on the steering wheel after the investment, composition CRV insists on having a small board of directors with as many board representatives as the founders (2 and 2). It is likely that the founders will look at to cave in on th is issue because it’s not likely that they would get better terms elsewhere. Even if it is unreasonable to put the 3 founders of the company on the board, as the VC will not want it to grow a founder majority, at least Mr. Laracey should be granted a plate as a CEO for a obstinate amount of time. In a very proto(prenominal) stage it is important for the Company to dumbfound the counselor-at-law of someone who founded and knows the business by heart. Perhaps to a greater extent importantly we have the warrants provision. There is a quick of scent economic reasoning behind this provision. If CRV cannot find another(prenominal) party to invest in the Company this will mean two things: investors are not involuntary to bet on the success of edocs which sends a minus signal to CRV, and it will result in an undiversification of its portfolio and consquently more than risk.\r\nCRV will consequently want a earnings for this extra risk and the warrants are apparently the an swer. We have to take edocs’ position into account though. As we will see later they have negogiating supplement and as such are in a position to change the provision. On the other hand, the clause at the least creates some perverse incentives for CRV. If CRV is or turns out to be confident about the future success of edocs it will not try to look for special investors and will just cash in the low-budget warrants. As such, and to make the term sheet a little more Company good we mean that the side letter should not be include in it.\r\nIn conclusion in a time where a large inflow of capital to VC funds is pushing valuations up, edocs has an opportunity to use that leverage to, while not explicitly shopping slightly the deal, eliminate the provisions that dilute their shareholdings excessively and to have some control of the Company during its first years. From the antecede discussion we can conclude that the term sheet is more investor friendly â€i. e. CRV friendly - than company friendly â€i. e. favorable for edocs. Therefore, in the negotiation process the venture capitalists have more to lose when the terms of the deals after negotiation, vainglorious edocs more ply in turn.\r\nAlso, from scupper 18-8 we can tell that the commitments of venture capitalists have been increasing exponentially over the past years. From this we can conclude that in that location are many potential VCs out at that place who might very well be unstrained to finance edocs at more favorable terms, handsome the latter again more bargaining power in the negotiation process. Laracey, Moran, and Canekeratne have done an considerable study on the competitive landscape in the electronic payment and plug-in presentment run market. They identified several (potential) competitors such as IBM, MSFDC, Checkfree, multinational Billing Services, and document services.\r\nCompared to edocs these firms are more conventional and are active in the market for a longer period of time, nonetheless they are all largely competing for the same clientele. In order to outstrip these parties edocs builds on many different key elements. First of all it offers advantages to the billing entity in the sense that it lay offs them to oppose from their competitors’ â€Å"print only” offerings. From a cost perspective, edocs allows for noteworthy savings in terms of document delivery, processing, remittance, and feeling costs. Also, the service will be beneficial for the node who receives the bills.\r\nThey can push the documents to the preferred e-mail package, and bill payment will be easier and not as time-consuming. Especially, the technological and strategic partnership with CyberCash will allow for â€Å"one-click” bill payment. The main point at which edocs differs from its competitors is that edocs is offered as a software product, whereas the competitors mainly offer cyberspace document production and delivery as a service. T he founders figured that competitors had a hard time gaining adoption for these service-only offerings, since customers are concerned about third parties stand in in the midst of the biller and the customer.\r\nAlso, the fact that Laracey, Moran, and Canekeratne had access to garish software development personnel in Sri Lanka allowed them to dissever themselves from their competitors, because edocs software was now developed both more quickly and cheaper than competitors could develop the software. Edocs can also be compared to similar firms from a financial point of view. Exhibit 18-6 gives an overview of financial data of comparable firms. However, it must be noted that it is questionable to what extent these firms are all really comparable to edocs.\r\nMore specifically, IBM and Xerox are much more established, mature firms. Documentum and Document Sciences are, like edocs, both young firms, because they only reveal sales data as of 1995. Checkfree is the only start-up in t his context of use that is not making profit so when wanting to do a relative valuation, using multiples that include net income does not make much sense. Hence, in order to come up with an implied valuation for edocs, we propose to do a multiple valuation, including the honest market value-to-sales multiple of comparable start-up firms as a relevant measure to compute the value of edocs.\r\nAppendix A gives an overview as to how we came up with this number. As said before, we disregarded the data from IBM and Xerox because these firms are in a much more mature phase than edocs. Subsequently, we computed the average MV-to-sales multiple for Documentum, Document Sciences and Checkfree over the period of 1994 to 1997. Next, this number was multiplied with each of the sales forecasts under the â€Å" organize performance scenario”(retrieved from Exhibit 18-4). Averaging the value of the period between 1998 and 2002 leaves us then with an implied value of $268. 3 million.\r\n '