the first owner will probably have restored it (or should have, otherwise you'll end up with all their stuff on it, and your friend won't be able to add their own). that's what the 'restore to new' option does, restores it back to how it was when it arrived out of the packet (although i think the software remains up-to-date, i'm not sure)
when buying anything second hand it's always wise to check around to see what sort of reputation the seller has. on ebay it's easy enough (assuming they've sold things on their before - they will have feedback reviews etc.).
personally i'm not sure i'd buy an iPod on ebay, though i have sold them on there before. guess it depends how much cheaper and how reputable the buyer is. if it is significantly cheaper, could signal something dodgy, but then one of the problems with ebay is the seller sets their own price often, and it's not always easy to know how much to sell something for. if they lived anywhere near me i might ask if i could look at the product in person, though there are some pretty convincing fakes around.
hope that helps