Topics: Venture capital, Private equity, Equity Pages: 11 (3865 words) Published: April 2, 2011

Duisenberg School of Finance
Amsterdam 2 March 2010

| | |edocs, Inc. | | | |Entrepreneurial Finance Assignment |

|Ellie Abdali |[ovu15189] |
|Natalie Shriber |[0433926] |
|Nikola Tadic |[ovu68532] |

1. Why does CRV ask edocs not to shop around the deal? What are the costs and benefits of “shopping around” the term sheet? Should edocs do it? A no shop clause is common primarily in M&A and private equity transactions and prevents the seller or investee/entrepreneur from looking for another bidder/investor- the reason for the inclusion of a no shop clause is that a buyer or investor plans to spend considerable time and resources conducting due diligence and does not want to run the risk of losing the deal or getting out-bid, hence the prevention from “shopping around.” CRV realizes that this is a hot market (VC commitments 21% CAGR for last 5 years) and that edocs represents a unique, high growth/return potential investment and wants to secure the deal for itself. CRV knows that edocs could take their term sheet and try to get other VCs to outbid/offer better terms to edocs and CRV wants to avoid a bidding war which would drive up the valuation (cost) and reduce CRV’s stake. This is also an important transaction for CRV, particularly for Jonathan Guerster, as this is his first VC transaction for CRV, so he wants to be sure he will not lose the deal. The CRV term sheet signifies instant certification and validation of the edocs business plan and investment opportunity- a no shop clause was necessary for CRV in order to hook in edocs without the fear of needing to enter a bidding war with another VC. However, from edocs perspective, there are both pros and cons to the no shop clause: The benefits for edocs include:

▪ Higher valuation, CRV term sheet acts as certification for the edocs opportunity and hence VCs will be willing to pay more to seal the deal on a high potential/lucrative deal; a higher valuation will mean that the founders will keep more of the company; which is also good for interest alignment/motivation; ▪ Renegotiation of key terms in favor of edocs the CRV term sheet would represent the best, most investor friendly option, thus any subsequent offer will need to adjust the terms to be more entrepreneur/edocs friendly or else they won’t get the deal- / minimum offer to edocs- opening up the bid, especially in a hot market such as 1998 could shift the bargaining power to edocs Cons for edocs:

- May not get additional bidders: edocs has spent months trying to find investors and they run a significant risk if they decide to shop around and in the end do not end up with any financing- time to market/first mover advantage is critical; - Negative signaling- the fact the edocs would dump the first, highly credible/experienced investor interested in their business could be a sign to other VCs of the quality and commitment of the sponsors- such an act of defiance could make other VCs questions whether putting up a competing bid would be worth their time- they would not want to get far in the negotiations only to have edocs sell out the first offer they are given; - Inability to raise full amount: While $2M may be easy to raise, it may be more difficult to find one investor willing to put in $4M; edocs may even have to try to negotiate with 2 or more parties and that may make the entire negotiation much more difficult and would put edocs in an even worse...
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