To Apex Investment Partners:
According to my analysis of the Accessline’s proposed term sheet, I do not believe that Apex would serve its own interests, or those of its investing partners, by investing in Accessline according to the terms proposed. By investing at the proposed valuation, according to the proposed control and incentive structure, Apex would be shouldering a disproportionate share of the risk should Accessline fail to meet its performance targets, or require fresh inflows of capital from future investment rounds. Nor can Accessline take the sort of steps necessary to protect its investment in the case of management failure.
Should Apex make a counter-offer, I would suggest the following terms:
Accessline’s projected revenues in 1999 are $208m. Using the average price/revenue ratio of 3com and Boston Technologies, it seems reasonable to expect an IPO valuation at 3.67 times revenues, producing gross proceeds of $764m with a present value of $116m (using our 60% discount rate). Assuming that Accessline meets this revenue target, and that no future funding is required, Apex will take a slight loss on its required rate of return, barring the voluntary distribution of the dividend from the board of directors, on which we are not offered a seat. The present price per share at such an exit would be approximately $7.84.
However, given Accessline’s historical burn rate, it seems unreasonable to expect the $16m investment produced in Series B to last Accessline until 1999. Assuming Accessline will need another $32m to reach its revenue targets by 1999, Apex takes a much more severe loss relative to its required rate of return. The present price per share at such an exit, assuming the new shares are also offered at $8 per share, would be $6.18 per share.
I therefore suggest using $6 per share as a point for a new valuation of the company, assuming the inclusion/revision of terms as described below....