Stability AI Co-Founder Says He Was Tricked Into Selling Stake For $100

Cyrus Hodes, the co-founder of London-based Stability AI, has sued the company and its chief executive, claiming he was tricked into selling his stake in the firm for only $100 (£76) only three months before a funding round that valued it at $1bn.

Hodes said in a lawsuit filed in San Francisco that Stability AI co-founder Emad Mostaque bought out his 15 percent stake in the firm after convincing him that the “company he had helped build was essentially worthless”.

Three months after the sale, in August 2022, the company raised more than $100m from venture capital firms Coatue and Lightspeed at a valuation of $1bn.

Stability AI, founded in 2020, is best known for its involvement with the development of Stable Diffusion, a text-to-image generation system that has become a viral hit amidst surging interest in generative AI tools such as ChatGPT.

‘Worthless’

Stability AI is currently attempting to raise more capital at a valuation of $4bn, according to the lawsuit, which would value Hodes’ shares at about $500m if he still held them.

“Mostaque’s purchase of these shares from his co-founder and minority shareholder for a mere $100.00 epitomises corporate greed at its worst and simply shocks the conscience,” the lawsuit says.

Stability AI said the suit was “without merit” and said it plans to “aggressively defend our position”.

The company initially developed generative AI technology intended to help governments respond to the Covid-19 pandemic, but this failed in part because Mostaque was diverting his attention and company funds to the image-generation project, about which Hodes was not informed, the lawsuit says.

Misconduct allegations

Hodes became concerned about the way Mostaque was running the company after finding that Mostaque was allegedly using company funds to pay rent on his family’s “lavish London apartment” and decided to leave the firm.

“Concerned about his personal liability and reputation in light of Mostaque’s misconduct and failure to perform, and led to believe that the company had no real value due to Mostaque’s failure to deliver the [Covid] project, Hodes decided to extricate himself from Stability AI,” the lawsuit says.

The company and Mostaque never disclosed their discussions with venture capital firms or the text-to-image generation business plan to Hodes, the suit adds.