You're correct, it's recommended that you use 3.5.17 as an intermediary step to avoid a few known user management problems. After everything's working, you can go straight to the latest 4.2.13 version.
Hope it helps.
The steps you need are in the standard documentation - see https://confluence.atlassian.com/display/DOC/Upgrading+Confluence and let us know if you get stuck.
Also, I think your tags are wrong, as OnDemand is already on version 4.
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