A co-founder of Stability AI has filed a lawsuit against the artificial intelligence startup and its CEO, accusing them of defrauding him when he sold his 15% stake in the company for a mere $100. The lawsuit, brought by Cyrus Hodes, alleges that CEO Emad Mostaque deceived him by claiming that Stability AI was essentially worthless, despite working on what would later become the popular image generator, Stable Diffusion.
Allegations of Deception and Concealed Venture Capital Talks
Hodes, a self-proclaimed “world-renowned thought leader” in artificial intelligence, further asserts that Stability AI and Mostaque failed to disclose their discussions with venture capital firms prior to Mostaque purchasing his stake in October 2021 and May 2022. According to the complaint filed in San Francisco federal court, Stability AI secured $101 million in financing last August, valuing the London-based company at $1 billion. The company has since sought additional funding at a $4 billion valuation.
Seeking Restitution and Punitive Damages
Describing Mostaque’s conduct as exemplifying “corporate greed at its worst,” the complaint seeks the restoration of Hodes’ 15% stake in the company, along with punitive damages for the alleged fraud and Mostaque’s breach of fiduciary duty.
Response from Stability AI and Future Prospects
In response to the lawsuit, Stability AI issued a statement via email, dismissing the claims as baseless and expressing their intention to vigorously defend their position. It is worth noting that the company had previously announced the financing in October.
Cyrus Hodes brings significant expertise to the table, having previously served as an adviser to the United Arab Emirates and as the artificial intelligence program director at Harvard University’s John F. Kennedy School of Government. Hodes claims to have devoted countless hours to Stability AI since early 2020, including working on a project aimed at helping governments respond more effectively to the COVID-19 pandemic, albeit with limited success.
Open Source Approach and Legal Challenge
Stability AI positions itself as the world’s leading open-source generative AI company, differentiating itself from closed-source competitors by making its technology accessible to the public.
In a separate legal matter, Getty Images, the stock photo provider, recently sought an injunction from a London court to prevent Stability AI from selling its image-generation system in Britain, citing alleged copyright violations.
Funding Struggles and Recent Developments
According to reports by Bloomberg News, Stability AI faced challenges in raising funds at a $4 billion valuation and recently managed to raise less than $25 million in a convertible note offering.
