AI Company Co-Founder Claims He Was Deceived Into Selling Shares for $100
The co-founder of Stability AI Ltd. has filed a lawsuit against the company, alleging that he was deceived into selling his shares for $100 several months prior to the British AI startup reaching a valuation of $1 billion.
Cyrus Hodes said he sold his 15 percent stake in Stability AI to another founder, Emad Mostaque, in two deals in October 2021 and May 2022, according to a federal lawsuit filed Thursday in San Francisco. Hodes claims Mostaque had led him to believe the company was “essentially worthless.”
In August 2022, Stability AI had unveiled the Stable Diffusion imaging tool and announced $101 million in venture capital funding, putting the startup at the forefront of the hot generative AI sector. Hodes accused Mostaque, who is also the company’s CEO, of breach of fiduciary duty.
“In self-dealing by an unfaithful fiduciary, Mostaque brazenly misled Hodes about the core business, probable value and fundraising of Stability AI, developed by Mostaque,” according to the suit.
A representative of the company and Mostaque did not immediately comment on the suit.
A former hedge fund employee, Mostaque registered Stability AI in the UK in 2019. He and Hodes, a former advisor to the United Arab Emirates and previous director of the artificial intelligence program at Harvard University, began working in early 2020 on the Collective and project. Augmented Intelligence Against Covid-19, or CAIAC, which aimed to provide public agencies with useful information about the pandemic. Over the next year, Hodes spent more than $15,000 of his own money to cover the company’s expenses, according to the lawsuit.
Read more: Vakaus AI secures convertible bond after fundraising battle
Stability AI did not meet the CAIAC project deadline. In the suit, Hodes alleged that this was because Mostaque “secretly diverted” resources to work on the text-to-image generator, the product that eventually became Stable Diffusion. Mostaque has previously blamed insufficient funding for not achieving the project’s goals.
Hodes is the co-founder of Stability AI who claims he was not fairly compensated in the lawsuit.
In May, physician Tayab Waseem, who said he served as the scientific director of Stability AI in 2020 on the CAIAC project, sued the company and Mostaque. Waseem claimed he was promised a stake in Stability AI but was told his work was voluntary after the company raised a $101 million round. However, Waseem withdrew the suit the same day he filed it.
Getty Images Inc. has also sued Stability AI in a London court in January, claiming that Stable Diffusion had illegally relied on copyrighted images to train its data. The company has denied the charges.
Read more: AI Art Faces is suitable for owners of images to fight online for free for everyone
Bloomberg News previously reported that Stability AI recently raised less than $25 million in convertible bonds from investors after struggling to raise a $4 billion funding round.
The case is Hodes v. Stability AI, 23-cv-03481, US District Court, Northern District of California (San Francisco).
