Here is how Kirkpatrick tells the story of Sean's arrest:
In the last week of August [2005, Sean] was on a kite-boarding vacation in North Carolina, where he had rented a house right by the beach with several friends, including a young woman who was his assistant at the company. That she wasn't yet twenty-one would figure in Parker's later difficulties. One night midway through their vacation week, they threw a party and invited the kite-boarding instructors, who in turn invited a bunch of their local friends. The party got so big that people began dropping in off the beach. Then two nights later, the final night, they hosted another, smaller gathering with the instructors. The group was sitting around drinking beer when a horde of police burst in with a search warrant and drug-sniffing dogs. They said they had a report that the house contained a large amount of cocaine, ecstasy, and marijuana. They proceeded to search everywhere to find it.
Parker and his friends repeatedly insisted that the police were mistaken and that there were no drugs. But finally, after about an hour, a policeman triumphantly returned brandishing a plastic bag containing white powder. Parker, who had signed the rental agreement for the house, was taken to the police station. When he got there he learned there had been reports of drug use following the party two nights earlier. After a lengthy back-and-forth over whether there was even enough evidence to book him, Parker was arrested for felony possession of cocaine. He was not formally charged with a crime. That would require an indictment. he was released immediately.
Kirkpatrick reports that when Facebook CEO Mark Zuckerberg heard the news, he wasn't that concerned. He writes, "No official charges had been brought, after all. (They never would be.)"
Facebook's top investor at the time, Accel partner Jim Breyer, was more alarmed – especially after talking to Sequoia's Mike Moritz, an investor in Napster (Sean was pushed out of that company too.)
"Breyer thought Parker was a liability for the company well beyond his actions in North Carolina, whatever they might have been. Though he had tremendous respect for Parker's intelligence, he saw him as bringing a volatile edge to the company's culture. Breyer was also aware of Parker's aversion to venture capitalists like himself."
In the end, Sean didn't want to go and Mark didn't want to fire him, but Facebook's first investor, Peter Thiel, convinced Sean it was best for Facebook and him to part ways. According to The Facebook Effect, Sean remained deeply involved in Facebook, even though he stopped taking a salary. (He is, after all, a huge shareholder who stands to make hundreds of millions of dollars on Facebook.)
Peter eventually hired Sean.