Microsoft stake in Facebook values site at $15bn

Little more than three years after its birth in a Harvard University dormitory, the social networking website Facebook has become one of the most expensive internet start-ups in history, with a valuation of $15bn (£7.3bn) under a financing deal with the software group Microsoft.

In an alliance announced last night, Microsoft bought a minority stake in Facebook for $240m, after shouldering aside a rival investment proposal from Google.

The deal turns Facebook's founder, Mark Zuckerberg, into a paper billionaire at the age of 23. He created the site, originally called TheFacebook.com, in February 2004 by uploading photographs from Harvard yearbooks to help his college peers keep in touch with each other. Initially restricted to school and college students, Facebook opened its doors to all comers a year ago and has rapidly become a global phenomenon, with 49 million regular users, including 5 million in Britain, and new registrations at a rate of 250,000 a day.

The website's future financial backing has pitted Silicon Valley's top companies against one another. Mr Zuckerberg turned down a takeover offer of more than $1bn from Yahoo! a year ago, but indicated that he wanted investment to expand the venture and fund acquisitions, prompting a furious struggle to win his favour.

Google and Microsoft emerged as the front-runners this month. They have been anxious to build a relationship with the site because it is increasingly being chosen as a home page by internet users, coming up automatically when they log on to their computers, something that has traditionally been a strong point for Google's search page and Microsoft's MSN.com.

Last night's deal assumed a notional value of $15bn for Facebook. Microsoft will get exclusive rights to sell advertising on Facebook, which currently has little revenue-raising content and is expected to make modest profits of $30m this year.

In a statement, Facebook's vice-president of operations, Owen van Natta, said the deal would allow the site to "continue to innovate and grow as a technology leader and major player in social computing".

Fans of Facebook praise the ease with which the site allows users to swap photos, video clips and gossip. But Mr Zuckerberg's success has brought controversy. Three former Harvard peers have sued him, claiming he stole the idea from them. Prosecutors in several US states also accuse Facebook of failing to do enough to protect its underage members from pornographic images and predatory advances.

Microsoft's valuation of Facebook easily outstrips the price tags on other successful online start-ups. The video sharing website YouTube was priced at $1.65bn when it was bought by Google last year. Facebook's key rival in social networking, MySpace, sold out to Rupert Murdoch's News Corporation for $580m in 2005.

News of last night's deal leaked out several hours before a formal announcement when a technology gossip website, Valleywag, noticed that Facebook's head of public relations, Brandee Barker, had suddenly added Microsoft's marketing chief, Adam Sohn, as a "friend" on her Facebook profile.

The deal is likely to meet opposition. Last night there were already more than a dozen groups on Facebook with names such as "I will close my account if Microsoft buys Facebook".