eBay to Craigslist: Oh no you didn’t

by Mathew on April 22, 2008 · 4 comments

Update:

A post at the newish Craigslist blog says that the company is:

“surprised and disappointed by Ebay’s unfounded allegations, which came to us out of the blue, without any attempt to engage in a dialogue with us.”

And the post goes on to say that eBay has no reason to feel threatened

“unless of course they’re contemplating a hostile takeover of craigslist, or the sale of Ebay’s stake in craigslist to an unfriendly party. (In which case, they’re out of luck!)”

So there you have it. Not much clearer than before, but it certainly lends some support to the “poison pill” idea. It’s possible that Craigslist implemented some kind of provision that would change the share structure in the event that eBay mounted some kind of hostile takeover attempt. Don’t you wish the court hadn’t sealed those documents? Maybe we can buy copies on Craigslist.

Original post:

It seems that now, along with other Craigslist mysteries — such as why the site sticks with that 1996 design, and why Jim and Craig don’t just sell out and buy a small Latin American country — we have the mystery of what the dynamic duo did to make eBay so mad. The auction site, which has about 300 employees and $2-billion dollars for every one that Craigslist has, is suing Craig and Jim for “unfairly diluting” eBay’s 25-per-cent stake in the classified service. As some readers may know, eBay wound up with a stake after an early employee sold his shares, something Valleywag has covered in great detail and was also confirmed by Craig in an interview with Sarah Lacey on TechTicker.

So what did Craig and Jim do to get eBay’s knickers in a knot? Dilution implies that shares were issued that reduced the value of eBay’s stake in the company. But why would Craigslist do that? Peter Kafka at Silicon Alley Insider says it’s likely because the classified site was raising money — although even he admits that doesn’t really make any sense. Why would a company with about $100-million in revenue and costs of about $30-million have to raise money? My friend Paul Kedrosky wonders whether Craig introduced some kind of poison pill that would reduce eBay’s stake if they pulled something the site didn’t like.

And what might that be? Well, what if eBay went into competition with Craigslist? That’s exactly what happened when eBay-owned classified site Kijiji announced last year that it was moving into the U.S., and it has quickly become a major competitor to Craigslist. The dilution eBay is complaining about took place in January — which is about the time that Kijiji was talking all kinds of smack about eating Craigslist’s lunch. Did Jim and Craig issue themselves some more stock around then? After all, they make up the entire board, and they own preferred voting shares while eBay owns common shares.

As Ashkan Karbasfrooshan at HipMojo says: “Put down the bong, the honeymoon is over.” And as my friend Rob Hyndman notes, this is an excellent lesson for all you startups out there — another example of why you need to maintain control over your stock.

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