Edocs, Inc. †Case questions

3. The almost authoritative barriers for edocs founder Kevin Laracey to further discuss in future duologues leave alone be the following(a) The valuation proposed by the Venture Capital beautifyors, a number that could easily be inflated by shopping the deal around as the opine capital market is booming. The Board of Directors provision, as Mr. Laracey wants to nominate sure that in the first years of the Company he provide re principal(prenominal) CEO, and that the co-founders of edocs will be part of it as well. The sh atomic number 18 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 Refusal which in essence binds edocs to future and larger equity participations from CRV. The warrants issue subject to the availableness of other VC investors. This clause is troublem almost for the CEO of edocs because it will cause further dilution of his his colleagues stakes in the Comp any. 4. As for Charles River Ventures, Mr. Guerster has essentially two main things in mind regarding the term sheet The board com coiffe, because he feels that Mr.Canekeratne is non competent to be a board member as he will bring no added esteem to the company, and a large board of directors is not feasible. The warrants issue that Mr. Guerster feels is an appropriate penalty for edocs if they cannot find other investors to do the deal with. 5. edocs is searching for venture capital financing in 1998, a vibrant year for the market. Furthermore, the term sheet that was presented to them was quite investor pally, with some strict provisions that unnecessarily burden the entrepreneurs. In short, edocs can and should conduct 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 higher valuation and the provision to include the employee share option pool in the valuation seems as well as onerous. An acceptable c ompromise between 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 VCs stake from 38% to 33%. May not seem like a respectable sum at first, but it may be applicable to encourage future financiers. The lower the A round investors stake, the better. Another provision that should be altered is the board composition.As it was mentioned before, this is bound to be one of the most contentious issues between the entrepreneur and the VC. The founders solicit that all 3 of them should be on the steering wheel after the investment, while CRV insists on having a small board of directors with as galore(postnominal) board representatives as the founders (2 and 2). It is likely that the founders will concur to spelunk in on this issue because its not likely that they would get better terms elsewhere. veritable(a) if it is unreasonable to put the 3 founders of the company on the board, as the V C will not want it to wealthy person a founder majority, at least Mr. Laracey should be granted a place as a CEO for a fixed amount of time. In a very early stage it is important for the Company to have the guidance of someone who founded and knows the business by heart. Perhaps more importantly we have the warrants provision. There is a rational economic reasoning behind this provision. If CRV cannot find another party to invest in the Company this will mean two things investors are not willing 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 so 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 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 additional investors and will just cash in the cheap warrants. As such, and to take aim the term sheet a little more Company favorable we believe that the side garner should not be included in it.In 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 around the deal, eliminate the provisions that dilute their shareholdings excessively and to have some misrepresent of the Company during its first years. From the preceding 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 overlook when the terms of the deals after negotiation, giving edocs more power in turn.Also, from abut 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 there are umteen 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 competitive landscape in the electronic defrayment and bill presentment services market. They identified several (potential) competitors such as IBM, MSFDC, Checkfree, International Billing Services, and chronicle services.Compared to edocs these firms are more established and are active in the market for a longer outcome of time, nonetheless they are all largely competing for the same clientele. In order to outperform these parties edocs builds on many different key elements. First of all it offers advantages to the billing entity in the sense that it allows them to differentiate from their competitors prin t but 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 beneficial 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 partnership 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 occupation and delivery as a service. The founders figured that competitors had a hard time gaining acceptance for these service-only offerings, since customers are touch on about third parties standing in between the biller and the customer.Also, the fact that Laracey, Moran, and Canekeratne had access to cheap software nurture personnel in Sri Lanka allowed them to differentiate themselves from their competitors, because edocs software was now interrupted 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 selective information of comparable to(predicate) firms. However, it must be noted that it is questionable to what extent these firms are all really comparable to edocs.More specifically, IBM and abscond are much more established, mature firms. scrollum and Document Sciences are, like edocs, both little firms, because they only reveal sales data as of 1995. Checkfree is the only start-up in this context that is not make 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 average market value-to-sales multiple of comp arable start-up firms as a relevant measure to cypher 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.