By Jonathan Stempel
NEW YORK (Reuters) – A Stability AI co-founder on Thursday sued the artificial- intelligence startup and its chief executive, claiming they defrauded him into selling his 15% stake for $100 just three months before the company reached a $1 billion market valuation.
In a complaint filed in San Francisco federal court, Cyrus Hodes said CEO and co-founder Emad Mostaque convinced him Stability AI was “essentially worthless” even as Mostaque worked on what would become a popular image generator, Stable Diffusion.
Hodes, a self-described “world-renowned thought leader” in artificial intelligence, said Stability AI and Mostaque also never revealed their talks with venture capital firms before Mostaque bought his stake in October 2021 and May 2022.
Stability AI last August lined up $101 million in financing that valued the London-based company at $1 billion, and has more recently sought funding at a $4 billion valuation, the complaint said.
Mostaque’s conduct “epitomizes corporate greed at its worst and simply shocks the conscience,” the complaint said.
Hodes wants his 15% stake restored, plus punitive damages for the defendants’ alleged fraud and Mostaque’s alleged breach of fiduciary duty.
Stability AI did not immediately respond to requests for comment. It announced the financing last October.
Hodes is a former adviser to the United Arab Emirates and artificial-intelligence program director at Harvard University’s John F. Kennedy School of Government.
He said he had worked “countless hours” since early 2020 at Stability AI, including on an ultimately unsuccessful project to help governments respond faster to the COVID-19 pandemic.
Stability AI describes itself as the “world’s leading open source generative AI company,” whose technology is open to the public, as opposed to at closed source companies.
In May, the stock photo provider Getty Images asked a London court to stop Stability AI from selling its image-generation system in Britain, citing alleged copyright violations.
Bloomberg News has reported that Stability AI recently raised less than $25 million in a convertible note offering after struggling to raise money at a $4 billion valuation.
The case is Hodes v. Mostaque et al, U.S. District Court, Northern District of California, No. 23-03481.
(Reporting by Jonathan Stempel in New York; Editing by Matthew Lewis)
