Stability AI co-founder sues company over stake sale

Entrepreneur Cyrus Hodes has sued Stability AI, the company he co-founded with CEO Mohammad Emad Mostaque in 2020, claiming that Mostaque intentionally deceived him about the company's value.

In 2021 and 2022, Hodes sold his 15 percent stake in the company - his only consideration for 18 months of service - for just $100. Then, just a few months after the sale, the company led a seed funding round that raised $101 million in investment at a $1 billion valuation. The company has since launched a new funding round with a $4 billion valuation, which, if successful, would make Hodes' former stake worth more than half a billion dollars.

The complaint, filed Thursday in U.S. District Court, Northern District of California, names Mostaque and Stability AI as defendants. Hodes seeks reinstatement of his share or an equivalent award as damages, as well as an additional award for monetary and punitive damages. Finally, Hodes demands that Mostaque and Stability AI "disgorge any profits or unjust enrichment derived from their wrongful acts."

How exactly, according to the co-founder, did Mostak allegedly defraud Hodes?

When Hodes joined Stability AI, he was already a world-renowned AI expert. He had previously founded blockchain startup AIGC Chain and advised the United Arab Emirates and the Organization for Economic Cooperation and Development on the new technology. Stability AI engaged Hodes to develop the Collective and Augmented Intelligence Against COVID-19 (CAIAC) trial project to help governments make decisions on Covid using generative AI.

However, the complaint says, Hodes began receiving disturbing information about Mostak, who had a degree in math and computer science from Oxford, 13 years of experience in British hedge funds and a failed venture called Symmitree that was supposed to provide technology access for people living in poverty but closed after a year, according to his LinkedIn.

In the complaint, Hodes alleges that "Mostak misappropriated Stability AI funds to pay the rent on his family's luxury London apartment" and that he "further learned that Mostak had a long history of defrauding investors in previous ventures in which he was involved."

At the same time, CAIAC was on the verge of failure and investors were not satisfied with the results of the project, which was severely delayed. The complaint alleges that these delays were caused by Mostak being distracted by a secret project that he failed to inform Hodes about: Stable Diffusion.

Stable Diffusion is the basis for generating text to image, and it refers to both the process that was used to create the image (diffusion) and the company that made its development possible (Stability AI). This product, which competes with OpenAI's DALL-E and Midjourney, has made Stability AI world famous. However, Hodes claims that Mostak kept the project secret so that he considered his stake virtually worthless, allowing him to part with it for far less than its value.

"This was corporate greed at its worst," said Hodes' attorney Avi Weitzman. "We look forward to full disclosure of the defendants' wrongdoing at trial."

"The lawsuit has no merit and we will aggressively defend our position," a Stability AI spokesperson wrote.

This isn't the first time a young startup has been embroiled in litigation. Earlier this year, artists filed a class action lawsuit against Stability AI and other companies, accusing them of using their copyrighted images to train image generation models.