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 $1bn start-up for just $100.

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

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

Hodes’ shares, had he still held them, could be worth about $500mn if Mostaque attains his target valuation. 

“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 suit says, which was filed in San Francisco.

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

Stability AI, which is headquartered in London and has operations in San Francisco bills itself as the “world’s leading open source generative AI company”, which supports researchers developing AI models. 

Stability AI’s best known contribution has been to Stable Diffusion, a tool which can create photorealistic images from text inputs 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 at Runway, an applied AI research company. Stability AI provided computing power and training data to support the efforts.

Hodes has worked on AI projects for the best part of a decade, with roles including advising the United Arab Emirates and the OECD on the national implications of the technology.

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

In the early days of Stability AI, Hodes had been working on developing a generative AI tool to help governments better respond to the Covid-19 pandemic, a project Hodes claims was ultimately unsuccessful because Mostaque was instead focused on building the text-to-image tool ultimately used by Stable Diffusion.

The suit claims that Hodes began to have concerns about how Mostaque was running the company — it alleges Mostaque used funds from Stability AI to pay rent on his family’s “lavish London apartment” — and decided to leave.

“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 suit claims.

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