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Updated Jul 13, 2023, 2:43pm EDT
tech

Co-founder of Stability AI, worth billions, says he was tricked into selling stake for $100

Reuters/Jakub Porzycki
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The News

Stability AI is being sued by a co-founder, who claims he was deceived into selling his 15% stake in one of the hottest startups in the sector for $100 to CEO Emad Mostaque, months before the company raised millions at a $1 billion valuation.

Cyrus Hodes accused Mostaque, who is also named in a lawsuit filed in a U.S. federal court on Thursday, of convincing him that Stability AI was worthless and hiding the company’s work on what became the popular image generator, Stable Diffusion.

Hodes, also a co-founder of blockchain AI startup AIGC Chain, said he sold his entire Stability AI stake in 2021 and 2022, after which the business raised $101 million in a seed funding round. More recently, it was seeking to raise money at a $4 billion valuation.

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“Mostaque’s purchase of these shares from his co-founder and minority shareholder for a mere $100.00 epitomizes corporate greed at its worst and simply shocks the conscience,” the lawsuit said. “Those transactions should be rescinded and Hodes’s ownership interest in Stability AI restored.”

The lawsuit, filed by lead attorney Avi Weitzman of law firm Paul Hastings, said Hodes spent countless hours working on Stability AI before he was bought out, focusing on its “central proof-of-concept project” to help governments develop faster and better responses to COVID-19 through generative AI. That effort later collapsed.

“Through lies and misrepresentations, Defendants caused Mr. Hodes to sell his shares in Stability AI—which are worth potentially hundreds of millions of dollars,” Weitzman said in a statement.

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In a written statement, a spokesperson for Stability said “The suit is without merit and we will aggressively defend our position.”

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Know More

The company is also facing other legal troubles. Getty Images has accused Stability of using copyrighted images to help train Stable Diffusion.

The latest lawsuit also adds to Stability AI’s internal problems, which Semafor highlighted in April. It has burned through cash and struggled to generate revenue, while Mostaque has lost the confidence of some employees.

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He can also be prone to exaggeration, people familiar with the matter said. Soon after raising $101 million, Mostaque told employees he planned to raise $1 billion more, signaling that the company was rapidly expanding.

It recently raised $25 million in a convertible note, after reportedly struggling to raise money at its desired $4 billion valuation.

Semafor reported that the company was in the process of looking for an executive similar to former Facebook COO Sheryl Sandberg, to help jumpstart its revenue generation. It has so far not made that hire.

Stability AI believes in open source artificial intelligence models, a departure from companies like OpenAI and Anthropic, which build closed source models and then sell access to consumers and other businesses.

Stability provides funding to academic researchers and others to help develop new, open source AI models. As a result, it doesn’t own the technology it creates. But Stability hopes to make money by charging companies to help implement it.

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