In the spring of 2004, former Craigslist employee and shareholder Phillip Knowlton was short on cash and his banker was shopping around his shares in Craigslist "around most of Silicon Valley" after a falling out with the company, according to eBay's Deputy General Counsel Brian Levey, who was testifying in the eBay v Craigslist corporate governance trial in Delaware on Tuesday.

Mr. Levey was responsible for helping out in eBay's three-way negotiations with Mr. Knowlton and Craigslist that resulted in eBay's acquiring 28% of Craigslist shares from Knowlton.

Mr. Levey met with Craigslist's outside counsel Ed Wes at the Empire Tap Room over a beer in May 2004 while watching a Lakers basketball game. Levey said Wes was putting the cart before the horse, already expressing his preference that eBay disseminate a press release in connection with the deal before the two lawyers had even worked out details of the Non Disclosure Agreement (NDA).

According to Mr. Levey, Mr. Wes mentioned that Craigslist founder Craig Newmark and CEO Jim Buckmaster viewed Phillip Knowlton as "receiving all the benefits, meaning a whole lot of money, while his clients were receiving nothing. He wanted some form of compensation for them," Mr. Levey said. "It was implicit that Craig and Jim wanted something in return, perhaps on an equal basis, was my impression."

eBay paid Mr. Knowlton $16 million, and paid Craigslist's Newmark and Buckmaster another $16 million, for $32 million for the shares and shareholder rights in total. The money eBay paid Newmark and Buckmaster went first from eBay to Craigslist and then from Craigslist to shareholders other than eBay - "My basis at the time was that they (Newmark and Buckmaster) didn't want word to get out that they made fair amount of money from the transactions," Mr. Levey said.

Mr. Wes also spoke of a possible Initial Public Offering (IPO), indicating there might be some exit strategy, "which was contrary to Craig (Newmark)'s public statement at the time," Mr. Levey said.

When eBay announced its investment in Craigslist, it did not reveal it had paid Craigslist executives $16 million, but Valleywag's July 26, 2007 article, "Craig Newmark, filthy rich on eBay's millions" (link) reported some facts based on sources familiar with the transaction, shattering some of the myths around the deal.

Much of what Valleywag's Owen Thomas wrote is now coming out in this week's trial. He got information from a source who also told him that Craig Newmark and Jim Buckmaster took out a lot of money out of the company in salaries and other forms of pay; the issue of executive compensation has not been raised as of yet during this week's testimony.

Only two weeks before the Valleywag article in 2007, in a Charlie Rose interview, Craig Newmark had been coy about just how much wealth he had, and would not reveal how much ownership he had in Craigslist.

The court will hear directly from Craigslist principals - Craig Newmark is expected to take the stand on Thursday, followed by Jim Buckmaster.

Trial proceedings will be updated regularly on the AuctionBytes Blog