A.I. Startup Founder Says He Was Tricked Into Selling His $600M Stake for $100

Stability AI cofounder Cyrus Hodes alleged CEO Emad Mostaque had led him to believe that the company was worthless.

Stability AI logo
Stability AI is reportedly seeking funding at a valuation of $4 billion. Omar Marques/SOPA Images/LightRocket via Getty Images

Cyrus Hodes could have been a half-billionaire had he not listened to his business partner. Hodes, the cofounder of Stability AI, the company behind A.I. image generator Stable Diffusion, cashed out his one million shares in the startup in May 2022 for just $100. Only three months later, Stability raised its seed round and was valued by private investors at a whopping $1 billion. Now, Hodes is suing his founding partner and Stability AI’s CEO Emad Mostaque and the company, alleging that Mostaque tricked him into thinking his stake in the company was worthless.

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Mostaque purchased Hodes’ entire 15 percent in Stability AI in two transactions in October 2021 and May 2022 for a total of $100, “having led Hodes to believe that the company he had helped build was essentially worthless,” according to a suit filed in a San Francisco federal court on July 13. After raising $101 million in a seed round in August 2022, Stability AI was valued at $1 billion. More recently, the company has been seeking funding at a valuation of $4 billion. At that valuation, Hodes’s shares would have been worth more than half a billion dollars had he not sold them, according to the plaintiff’s calculation.

Mostaque’s purchase of these shares “epitomizes corporate greed at its worst and simply shocks the conscience,” the lawsuit said. “The purchase of Hodes’s shares were plainly based on fraud, misrepresentations, and breaches of fiduciary duty.”

In the suit, Hodes also alleged Mostaque had embezzled company funds “to pay for the rent for his family’s lavish London apartment” and had a long history of “cheating investors” in past ventures. Stability AI said the suit is “without merit” and it will “aggressively defend our position,” a company spokesperson said in a statement to Observer. Stability AI was founded in 2020. Its flagship product, Stable Diffusion, is a leading competitor of OpenAI’s Dall-E. Both image generators were released in early 2021. Stable Diffusion’s popularity has drawn a lawsuit from Getty Images, which accused the startup of using millions of copyrighted images to train A.I. models.

Hodes comes from a consulting and public policy background. He is a member of multiple global organizations that study A.I.’s impact on healthcare, climate and other social areas, according to his LinkedIn profile. Since exiting Stability AI in May 2022, Hodes has cofounded a new generative A.I. company called AIGC Chain, which focuses on developing ethical and responsible A.I. models, according to its website.

Mostaque was a hedge fund manager in the U.K. before cofounding Stability A.I. He has been accused of making misleading claims about his background and achievements. He disputed some of the claims in detail in a personal blog post in June. Speaking with UBS analysts on a call earlier this month, Mostaque said A.I. will be “one of the biggest investment themes over the next few years” but said he thinks A.I. will be “the biggest bubble of all time.

A.I. Startup Founder Says He Was Tricked Into Selling His $600M Stake for $100