Craig Newmark, filthy rich on eBay's millions

Everything you know about Craig Newmark is wrong. The tale that Craigslist's founder and CEO Jim Buckmaster like to tell about how eBay got a stake in their company goes like this: Newmark, the clueless business naif, issued shares to an employee, never thinking they'd be cashed in. That employee turned around and sold the shares right under Newmark's nose to rapacious auctions giant eBay back in 2004. It's a good story. But it's nothing like the truth, according to sources close to the transaction. And the truth? That Newmark and Buckmaster, who love to portray themselves as unpretentious types who care nothing for money, can be bought. For a mere $16 million.

Phillip Knowlton, the employee in question, is believed by friends to be a cofounder of Craigslist, although the company does not recognize that status. He had earned a 25 percent stake in the company. But he held common shares, while Newmark and Buckmaster held preferred stock. That allowed Newmark and Buckmaster to try to squeeze Knowlton out of the company by issuing new shares to dilute his ownership stake.

Desperate to protect his ownership in Craigslist, Knowlton got in touch with people at eBay, who struck a deal for their employer to acquire his stake. Publications as august as Fortune have reported this as a straightforward sale, without Craigslist's consent. Here's what Adam Lashinsky wrote in 2005:

The transaction only occurred because Newmark had given a quarter-share to an employee, Phillip Knowlton.... As for the money eBay shelled out, that went to Knowlton, not Craigslist.

I know Lashinsky, who's a good reporter, and can only conclude that a source — likely one close to Craigslist — led him astray. Because both of those statements are false, according to my sources. (Thanks to valleygurl for the tip left in the comments.)

So what actually happened? eBay, my sources tell me, agreed to pay an amount around $16 million to Knowlton, and an equal amount to Craigslist, bringing the total paid by eBay to more than $30 million. The company, in turn, immediately paid out that $16 million sum as a dividend to Newmark and Buckmaster, according to their stakes in the company. Buckmaster reportedly holds 40 percent, with Newmark owning the rest, which would suggest Buckmaster got about $6 million and Newmark $10 million.

And those amounts, in turn, are dwarfed, insiders believe, by the amounts Newmark and Buckmaster take out of the company in salaries and other forms of pay. With only around 20 employees and an estimated $150 million in revenues, Craigslist is widely thought to be staggeringly profitable.

Remember this whenever you see Craig Newmark pull his "I'm-just-a-customer-service-rep" act. Remember this when Buckmaster says Craigslist only cares about its customers. Because, like the rest of Silicon Valley, they're all about the money. Unlike the rest of you, they're just better at hiding it.

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