Stability AI co-founder claims he was duped into selling 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 duped into selling his stake in the $1 billion start-up for just $100.

Cyrus Hodes, who co-founded Stability with current chief executive Imad Mostak in 2020, claimed in a lawsuit filed Thursday that Mostak bought his entire 15 percent stake after explaining that “the company he helped build she was basically useless”.

But in August 2022, three months after buying out his co-founder, Mostack led a $101 million funding round that gave the UK-based company a post-money valuation of $1 billion. According to the lawsuit, Stability AI is now attempting to raise new capital at a $4 billion valuation, fueling interest in generic AI following the launch of ChatGPT by OpenAI late last year.

If Mostac achieves its target valuation, Hodes’ shares, if still held, could be worth approximately $500 million.

The lawsuit, filed in San Francisco, states, “Mostak’s purchase of these shares from his co-founder and minority shareholder for a mere $100.00 reflects corporate greed at its worst and shocks the conscience.”

“The lawsuit is baseless and we will aggressively defend our position,” Stability AI said.

Stability AI, headquartered in London with operations in San Francisco, bills itself as “the world’s leading open source generative AI company”, supporting researchers developing AI models.

Stable’s most famous contribution has been Stable Diffusion, a tool that can create photorealistic images from text input and which has become a viral hit since its launch last year.

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

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

According to the lawsuit, he met Mostak at the 2019 summit in Dubai and the two struck up a friendship that later turned into a business relationship.

In the early days of Stability AI, Hodes was working on developing a generative AI tool to help governments better respond to the COVID-19 pandemic, a project Hodes claims ultimately failed because Mostac instead Focused on creating text-to-images. The equipment is eventually used by steady diffusion.

The lawsuit claims that Hodes had begun to worry about how Mostak was running the company – it alleges that Mostak embezzled money from Stability AI to pay the rent on his family’s “lavish London apartment”. Used – and decided to leave.

“Concerned about his personal liability and reputation in light of Mostak’s misconduct and failure to perform, and convinced that Mostak’s failure to complete the (Covid) project was of no real value to the company, Hodes decided to separate itself from Stability AI, the lawsuit claims.

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