What algorithm does Better Settlers use?
The code for Better Settlers is open-source and can be found at github.com/andrewflynn/bettersettlers. Not the easiest format to read on the algorithm, but hopefully that helps a little bit.

Also to answer Markus' concern above about taking away the tension of setup, Better Settlers still has that same tension (and arguably even more so because it's actually even more difficult to figure out what the best spots are).

The thing that Better Settlers tries to avoid is situations where combinations of starting positions are completely unbalanced. You still have the same pros/cons of placing first vs. last; it's just at the end of it, everyone stands a much better chance of still being in the game.