Most of you have already seen the news about eBay‘s claim again Craigslist reported in Wired and other places. Apparently, eBay is concerned about some action that the Craigslist folks took that diluted eBay’s holdings. Which left me scratching my head a bit, given the little I know about Craigslist, which is that I found it surprising that they would have sought financing (as I couldn’t see why they would want or need it given Craigslist particular approach to its site). However the Wired article explained:

EBay, the world’s largest online auctioneer, was an unsolicited suitor to quirky Craigslist in 2004. An unnamed former Craigslist shareholder sought out eBay and sealed a deal whose financial terms were never disclosed.

Ouch. Presumably, the folks at Craigslist either did not have that shareholder under a shareholders agreement, or they did, but it did not have provisions that would, for example, allow for the right to repurchase shares in certain situations, such as when the shareholder is thinking of selling to someone else, who might, for example, be a competitor, or become a competitor.

Which is why the first piece of advice I give to startups and other early stage companies is that they should be very, very, very careful when it comes to issuing stock or options. Its great that companies want employees and others to share in their prosperity as they grow, but very often what is overlooked is that shares (or stock as those Yanks call it) in addition to providing an economic benefit as they appreciate, also provides for a whole host of rights that you may or may not necessarily want to give out. And which don’t require a majority to exercise (but which can still be a royal pain to deal with), as eBay’s claim illustrates (I should emphasize that I’m not commenting on whether or not eBay’s claim has merit, but rather the circumstances that allowed it to happen in the first place).

Shareholders, even small shareholders, have the potential to cause a lot of difficuties for companies (particular smaller companies) through not only their voting rights, but also statutory rights, such as claims of oppression or the ability to require a company to be audited. For those considering option plans or share ownership plans, its usually a good idea to investigate alternative but equivalent forms of compensation (profit sharing, phantom stock) before going with option or share plans. And if even if you do decide on options or shares, please, please, please get a shareholders agreement in place – trust me, you won’t regret it.