Five Lessons from the eBay-Craigslist Fight

(page 2 of 2)

Generally, it's a good idea to spend time crafting your go-to-market strategy for an alliance and coming up with extensive deliverables before you sign off on the transaction. Key questions for both companies to hash out together include: Who will work on the various parts? What are the timelines? How are the capital contributions allocated? What is the profit split? In a way, it's as if both sides are putting together a comprehensive business plan. For more on what to consider, read my previous column.

3. Put an exit plan in place as part of the deal. It could be in the form of a buyout clause. Craigslist could have negotiated the right to purchase back the equity interest, but eBay rejected this. The company saw its ownership in Craigslist as vital and wanted it to be solid. According to its legal brief, Craigslist said there was a "gentleman's agreement" for a buyout arrangement. But such unwritten agreements are usually not enforceable, especially when they are between two sophisticated parties.

4. Protect confidential information. Intellectual property is often the most valuable asset for a company, especially in the tech world. This is why it's critical to negotiate hard on protecting confidentiality as well as limiting the use of information. As for the eBay-Craigslist dispute, there is disagreement on how broad these protections were in the shareholder agreement. Could this information be used for the launch of Kijiji? The courts will likely decide that question.

Besides strong contractual provisions, it is also smart to find other ways to protect intellectual property from the other party. This might include filing a patent with the federal government and making the technology a trade secret (which means taking comprehensive steps to protect its confidentiality).

5. Beware of tough terms. Even though eBay was a minority shareholder, it still managed to get lots of leverage. In the shareholder agreement, the company negotiated protections such as veto rights over the issuance of new shares; the ability to block certain transactions; a right to inspect the books; and a right of first refusal on the sale of the founders' shares. And of course, there was the right to compete in the classifieds market.

Sound one-sided? Keep in mind that companies with more leverage than yours can exact tough terms—and once you agree to them, it's nearly impossible to get rid of them. Of course, Craigslist did make some strong attempts to do so. By using a variety of intricate legal maneuvers, the company was able to reduce eBay's ownership from 28.5% to 24.85% and even eliminate its board seat. Of course, these actions resulted in one of its current lawsuits, which is likely to be expensive and time-consuming.

Had Craigslist negotiated stronger protections—such as a buyout clause—then these maneuverings would likely have been moot. Of course, there is a good chance that eBay would have balked. If so, the best choice for Craigslist may have been to find another buyer for the interest.

The eBay-Craigslist dispute offers a rare glimpse into the complexities of strategic alliances. Yes, even top operators can botch relationships. Like any complex business arrangement, you need strong planning, tough negotiations, and a good exit plan.

Tom Taulli is a noted finance author and blogger.

Business Exchange

Track and share business topics across the Web.