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eBay Acquired Magento For Over $180 Million – But Not Everyone Is Smiling

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Earlier this month, eBay acquired Magento, developer of an open-source e-commerce platform. Terms of the deal were not disclosed, but we’ve heard from multiple sources that the ecommerce and digital payments giant paid north of $180 million for the company, which will become one of the pillars of eBay’s new X.commerce group (alongside PayPal, Milo and RedLaser).

From what I’ve confirmed with sources who have direct knowledge of the transaction, eBay had already purchased a minority stake (49 percent to be exact) in Magento for $90 million – and not $22.5 million – back in March 2010. The same sources acknowledge that eBay bought out the remainder of shares at the same valuation just a few weeks ago.

An eBay spokesman declined to comment on any specifics about the deal.

Apart from the purchase price, we’ve also learned that there is more to this deal than meets the eye, so we dug a little to find out what’s going on behind the scenes.

In case you’re not familiar with the open source Magento e-commerce platform, it basically enables merchants and brands to have a decent amount of control over the look, content, SEO, digital marketing and functionality of their online storefronts.

Originally, Magento was a product developed and marketed by Varien, a decade-old e-commerce software and consultancy company. Only when eBay invested in the e-commerce platform in March 2010 was Magento effectively incorporated as a stand-alone venture.

When that reincorporation occurred, former Magento executives tell me, its management went to great lengths to avoid paying out employees who helped build the company in the years prior to the eBay investment. It’s always possible this is all coming from disgruntled former employees, and I should note that both eBay and Magento president Bob Schwartz declined to comment on the rumors when confronted with these allegations.

Nevertheless, several sources I’ve spoken with in the past few days and who are in a solid position to know, tell me that several former Magento executives and employees have already hired an attorney – who is currently engaged in negotiation talks with the company and its new owner – and are considering pursuing lawsuits to get what they (think they) deserve.

Those former employees claim they’ve collectively been ‘cheated out’ of nearly 7% to 10% of Magento, a stake that would have been worth approximately $18 million when eBay acquired the company.

One source tells me that when eBay invested in Magento last year, all employees that held equity in the company were told that their existing contracts were null and void and that they had 24 hours to sign new contracts – diminishing their stakes – or be unequivocally fired.

I repeatedly asked Magento management to respond to these allegations, but they referred me to an eBay PR representative, who declined to comment.

For what it’s worth, I heard rumblings about the way Magento’s reincorporation proceeded way before eBay made its move, but the noise evidently got louder when Magento was acquired.

The attorney who’s currently engaged in conversations with eBay’s legal department, in a letter to executives from eBay, PayPal and Magento before the acquisition was announced, described the claims of the former employees who are considering filing a lawsuit as follows:

“Their fundamental claims are that, as a result of eBay’s investment, and Varien’s reincorporation to Magento, Inc, their agreements with Magento were intentionally handled unfairly. They, and others, consistently claim that the re-incorporation of Magento was coupled with a concerted effort to force each of them to sign new employment agreements under duress, without any opportunity to seek advice from outside counsel, and threatened loss of continued employment which wrongly stripped them of their previously existing contractual rights.

They also claim that the company was purposely undervalued for the purposes of paying them the rightful amount due to them at the time of investment by eBay into Magento, in order to enrich the principal shareholders of Magento.”

An eBay spokesperson declined to comment since there is currently no pending litigation, apart from stating that the company believes such litigation would be “without merit” – though I should note that I keep hearing from sources that the lawsuit is definitely “coming soon”.

We’ll continue to monitor this story and update when there’s more information to share.

Also read: eBay Closes $2.4 Billion Acquisition Of GSI Commerce