Google has agreed to buy San Bruno video-sharing site YouTube in an all-stock deal worth about $1.65 billion.

Under the terms of the deal, YouTube will remain independently operated at the outset, keeping a separate brand and keeping its headquarters in San Bruno, and all YouTube employees will remain with the company. Google will keep running Google Video.

This is a spectacular hit for the two founders Chad Hurley and Steve Chen, who started YouTube less than two years ago. Hurley, Chen and another key employee, Jawed Karim, each stand to make between $100 and $200 million from the deal, according to some reports.

Sequoia Capital, the venture firm that provided most of YouTube’s $11.5 million in backing, meanwhile, is said to have roughly 30 percent of the company, which puts its stake at about $495 million.

Of course, this is nothing like the Google IPO hit, where the take by Larry Page and Sergey Brin was in the billions of dollars, and where backers Sequoia and Kleiner Perkins made much more money too. But the comparison isn’t a good one, because Google held back from going public for several years, and was far more mature. Still, this solidifies Sequoia’s status as the valley’s top-dog venture capital firm for now.

Both companies have approved the transaction, which the companies expect to close in the fourth quarter.

Here is more from our earlier coverage on deals with large media companies the two companies have made, which go along way to solving YouTube’s copyright issues. At yesterday’s news conference, YouTube’s co-founders said Google’s promise to help YouTube create a system that could sort through the copyright mess was key to getting the deal done (see Merc story today.) Also, here’s a Merc piece about the company’s quick “garage-to-riches” story. It confirms the impression we at VentureBeat have from meeting the two founders: “extremely low-key” and “smart.”

Meanwhile, the analysis begins about what this merged company will be like. Both companies have shown the propensity to use their own judgement — sometimes difficult to decipher — about what gets to stay up on their sites and what doesn’t. Google raised controversy when it rejected some political ads. Now YouTube is getting push back, too, after its rejection of a video entry by right-wing blogger, Michelle Malkin.

Update: Artis Capital Management, a hedge fund in San Francisco was also investor in YouTube, something previously undisclosed. Artis co-invested in YouTube with Sequoia Capital in the startup’s $8 million Series B this spring, according to PE Week. In two rounds of funding, YouTube raised $11.5 million.

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