Stability AI co-founder claims he was tricked into selling a stake for $100

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The co-founder of artificial intelligence company Stability AI is suing the company and its boss, claiming he was tricked into selling his stake in the billion-dollar startup for just $100.

Cyrus Hodes, who co-founded Stability AI with current chief executive Emad Mostaque in 2020, claims in the lawsuit filed Thursday that Mostaque bought his entire 15% stake after persuading him that “the company he had helped build was essentially worthless”.

But in August 2022, three months after buying out its co-founder, Mostaque led a $101m funding round that gave the UK-based company a post-money valuation of $1bn. Stability AI is now trying to raise new capital at a $4 billion valuation, according to the suit, riding a wave of interest in the generation AI sparked by OpenAI’s launch of ChatGPT late last year.

Hodes’ shares, if he still held them, could be worth around $500 million if Mostaque hit his target valuation.

“Mostaque’s purchase of these shares from its co-founder and minority shareholder for only $100.00 embodies corporate greed at its worst and is simply shocking the conscience,” says the lawsuit, which was filed in San Francisco.

“The lawsuit is without merit and we will aggressively defend our position,” Stability AI said.

London-headquartered and San Francisco-based Stability AI bills itself as the “world’s first open-source generative AI company,” supporting researchers developing AI models.

Stability AI’s best-known contribution has been Stable Diffusion, a tool capable of creating photorealistic images from text input that has become a viral hit since its launch last year.

The technology behind Stable Diffusion was developed by a group of researchers in Munich and at Runway, an applied AI research company. Stability AI provided the computing power and training data to support the efforts.

Hodes worked on AI projects for the better part of a decade, including advising the UAE and the OECD on the technology’s national implications.

According to the suit, he met Mostaque at a 2019 summit in Dubai and the two formed a friendship that later turned into a business relationship.

At the start of Stability AI, Hodes had worked on developing a generative AI tool to help governments better respond to the Covid-19 pandemic, a project according to Hodes that ultimately fell through as Mostaque instead focused on building the text to image tool eventually used by Stable Diffusion.

The lawsuit claims that Hodes grew concerned about the way Mostaque was running the business — he alleges Mostaque used funds from Stability AI to pay the rent for his family’s “lavish London apartment” — and decided to leave.

“Concerned about his personal liability and reputation in light of Mostaque’s misconduct and non-performance, and led to believe that the business was of no real value due to Mostaque’s inability to deliver the [Covid] project, Hodes has decided to withdraw from Stability AI,” the lawsuit claims.

Mostaque and Stability AI “never disclosed their discussions with venture capitalists to Hodes, or even that Stability AI’s new business plan involved text-to-image generation,” it adds.