How to create xpi file with 7Zip?

If you are on windows (to install cygwin it looks like you do), you can use the windows built in tool:

1. Select the contents of the extension (remember, don’t select the outside folder).
2. Right Click
3. Send to
4. Compressed (zipped) folder

Then just replace the .zip for .xpi in the filename

Looks like your problem is on completing the point 1. correctly. Select only the contents of the extension. Not the folder that contains it.

So basically your zip file should have following structure:

my_extension.zip
  |- install.rdf
  |- chrome.manifest
  |- <chrome>

and NOT this structure:

my_extension.zip
  |- <my_extension>
       |- install.rdf
       |- chrome.manifest
       |- <chrome>