Edocs, Inc. †Case questions

3. The most alpha margeinal figures for edocs founder Kevin Laracey to further discuss in coming(prenominal) negotiations leave behind be the following The valuation proposed by the Venture Capital investors, a number that could easily be blow up by shopping the deal around as the menace jacket crown trade is booming. The Board of Directors provision, as Mr. Laracey inadequacys to make sure that in the freshman years of the Company he get out remain CEO, and that the co-founders of edocs give be part of it as well. The share vesting schedule, which Mr. Laracey feels represents a lack of faith by the Venture Capital Investors in them. The Anti-dilution and Right of first off Refusal which in inwardness binds edocs to future and larger equity participations from CRV. The warrants issue subject to the availability of opposite VC investors. This clause is troublem round for the CEO of edocs because it will cause further dilution of his his colleagues risks in the C ompany. 4. As for Charles River Ventures, Mr. Guerster has essentially two main things in mind regarding the marches sheet The board com postal service, because he feels that Mr.Canekeratne is non suitable to be a board member as he will bring no added value to the company, and a large board of directors is not feasible. The warrants issue that Mr. Guerster feels is an earmark penalty for edocs if they cannot find other investors to do the deal with. 5. edocs is searching for opine capital financing in 1998, a vibrant year for the market. Further much, the term sheet that was presented to them was quite investor well-disposed, with some strict provisions that unnecessarily force the entrepreneurs. In short, edocs can and should negotiate some of the terms presented to them by CRV.First of all edocs is aware that if it shopped the deal around it could get a high valuation and the provision to include the employee share preference pool in the valuation seems too onerous. An acceptable compromise in the midst of committing to CRV and to laden their s gull so much in the beginning would be to exclude the option pool from the valuation. This would change the VCs stake from 38% to 33%. may not seem like a respectable sum at first, but it may be relevant to encourage future financiers. The lower the A round investors stake, the better. Another provision that should be modify is the board composition.As it was mentioned before, this is bound to be one of the most agonistical issues between the entrepreneur and the VC. The founders argue that all 3 of them should be on the steering wheel after the investment, patch CRV insists on having a crushed board of directors with as many board representatives as the founders (2 and 2). It is likely that the founders will keep back to cave in on this issue because its not likely that they would get better terms elsewhere. Even if it is unreasonable to spue the 3 founders of the company on the board, as the VC w ill not want it to boast a founder majority, at least Mr. Laracey should be granted a place as a CEO for a wintry amount of period. In a truly early stage it is important for the Company to have the guidance of someone who founded and knows the business by heart. peradventure more than importantly we have the warrants provision. There is a rational sparing reasoning behind this provision. If CRV cannot find another party to invest in the Company this will mean two things investors are not instinctive to bet on the success of edocs which sends a negative signal to CRV, and it will result in an undiversification of its portfolio and consquently more risk.CRV will consequently want a compensation for this extra risk and the warrants are apparently the answer. We have to take edocs position into account though. As we will see later they have negogiating leverage and as such are in a position to change the provision. On the other hand, the clause at the least creates some perver se 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 additional investors and will just cash in the cheap warrants. As such, and to make the term sheet a little more Company favorable we entrust that the side letter should not be included in it.In conclusion in a time where a large influx of capital to VC funds is pushing valuations up, edocs has an opportunity to use that leverage to, while not explicitly shopping around the deal, eliminate the provisions that dilute their shareholdings excessively and to have some control of the Company during its first years. From the preliminary discussion we can conclude that the term sheet is more investor friendly i. e. CRV friendly- than company friendly 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, giving edocs more power in turn.Also, from Exhibit 18-8 we can t ell that the commitments of venture capitalists have been increasing exponentially over the past years. From this we can conclude that thither are many potential VCs out there who might very well be willing to finance edocs at more favorable terms, giving the latter again more bargaining power in the negotiation process. Laracey, Moran, and Canekeratne have done an extensive study on the free-enterprise(a) landscape in the electronic defrayment and bill presentment work market. They identified several (potential) competitors such as IBM, MSFDC, Checkfree, International Billing Services, and schedule services.Compared to edocs these firms are more established and are active in the market for a longer period of time, nonetheless they are all more often than not competing for the same clientele. In locate to outperform these parties edocs builds on many polar key elements. First of all it offers advantages to the billing entity in the sense that it allows them to score from thei r competitors print only offerings. From a cost perspective, edocs allows for significant savings in terms of document delivery, processing, remittance, and printing costs. Also, the service will be right for the customer who receives the bills.They 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 union with CyberCash will allow for 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 Internet document issue and delivery as a service. The founders figured that competitors had a hard time gaining acceptance for these service-only offerings, since customers are concerned about third parties standing in between the biller and the customer.Also, the fact that Laracey, Moran, and Canekeratne had access to cheap software development staff office in Sri Lanka allow ed them to differentiate 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 mustiness be noted that it is questionable to what extent these firms are all real comparable to edocs.More specifically, IBM and Xerox are much more established, jump on firms. Documentum and Document Sciences are, like edocs, both young firms, because they only reveal gross sales data as of 1995. Checkfree is the only start-up in this context that is not fashioning profit so when wanting to do a relative valuation, victimization triunes 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 two-fold valuation, including the average market value-to-sales multiple of com parable start-up firms as a relevant measure to compute the value of edocs.Appendix 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 target 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.