Did Craigslist Dupe eBay?

There's a mysterious battle brewing between eBay and Craigslist, and it has the perfect cast for what's sure to play out as an Oscar-worthy drama set in sunny Silicon Valley.

The online auction giant eBay, which bought a 28 percent stake in the classified site in 2004, sued Craigslist in Delaware's Court of Chancery today for allegedly diluting its stake in the company.

The details are few, since the complaint is sealed. And in fact, the details surrounding eBay's 2004 investment are murky at best. So allow us to speculate.

When the deal was consummated, Craigslist co-founders Craig Newmark and Jim Buckmaster put their happy faces on for the public. EBay reportedly bought $16 million worth of shares from a third, unnamed employee who had been given a stake early on in the company's development. Here's how the San Francisco Chronicle reported it:

Over two months of meetings, EBay assured Newmark and Buckmaster it would not pursue the deal unless they were happy about it, Buckmaster said. Both men said they felt that EBay CEO Meg Whitman and founder Pierre Omidyar "showed that they were interested in us for all the right reasons," as Newmark put it on his blog.

"Once we knew this equity interest was likely to change hands, we can't imagine a better outcome than the one we've gotten here," Buckmaster said.

EBay will likely appoint a third member to Craigslist's board, but it will not invest capital in the company, Buckmaster said. "We've never taken outside financing and don't intend to," he said.

But then last summer, Valleywag reported more, unsourced details about the transaction (like we said: murky.). The early employee who allegedly sold his stake eBay, Phillip Knowlton, was supposedly desperate to do so because Newmark and Buckmaster were threatening to dilute his ownership by issuing more common stock. Knowlton reportedly owned common shares, while Newmark and Buckmaster held preferred shares.

Why was the timing of the Valleywag post so peculiar? It was mere weeks after eBay launched Kijiji, a direct competitor to Craigslist. EBay, which it said in 2004 would "share knowledge, expertise, and resources" with Craigslist, was evidently so fond of its investment that it went out and started a direct competitor to it. Kijiji has reportedly grown to be 10 percent the size of Craigslist in just six months.

And what about that board seat that Buckmaster promised to eBay back in 2004? Omidyar occupied it until last year. But since then, Buckmaster and Newmark have remained the only two members on Craigslist's board.

Did Newmark and Buckmaster decide to issue more common shares for themselves in order to dilute eBay's interest in retaliation to the Kijiji launch?

Like we said, it's just speculation.

by Megan Barnett