Tech entrepreneur Cyrus Hodes is suing Stability AI, the company he co-founded with CEO Mohammad Emad Mostaque in 2020, alleging that Mostaque willfully deceived him about the value of the company.
In 2021 and 2022, Hodes sold off his 15 percent stake in the company —his only compensation for 18 months of work— for a mere $100. Then, just months after it was sold, the company engaged in a seed-funding round that generated $101 million in investment at a valuation of $1 billion. The company has since started a new funding round at a valuation of $4 billion, which if successful would make Hodes’ former stake worth over half a billion dollars.
The complaint, filed Thursday in the U.S. District Court, Northern District of California, names Mostaque and Stability AI as defendants. Hodes is seeking a reinstatement of his stake, or an equivalent reward for rescissory damages, as well as additional rewards for monetary and punitive damages. Lastly, Hodes demands that Mostaque and Stability AI “disgorge any profits or unjust enrichments based on their misconduct.
How exactly did Mostaque allegedly defraud Hodes, in the co-founder’s view?
When Hodes joined Stability AI, he was already a world renowned AI expert. He had previously founded blockchain AI startup AIGC Chain and consulted the United Arab Emirates and Organisation for Economic Co-operation and Development on the emerging technology. Stability AI brought in Hodes to help develop the proof-of-concept project Collective and Augmented Intelligence Against COVID-19 (CAIAC), which was meant to aid governments in decision-making around Covid using generative AI.
Yet, according to the complaint, Hodes started receiving some troubling information about Mostaque, who had a degree in Mathematic and Computer Science from Oxford, 13 years of experience at UK-based hedge-funds, and a failed venture called Symmitree that was supposed to provide technological access to people in poverty, but which shuttered after a year, according to his LinkedIn.
In the complaint, Hodes alleges that “Mostaque had embezzled funds from Stability AI to pay the rent for his family’s lavish London apartment” and that he “further learned that Mostaque had a long history of cheating investors in prior ventures in which he was involved.”
Meanwhile, CAIAC was floundering and investors were unimpressed with the results of the project, which was experiencing heavy delays. The complaint alleges that those delays were due to Mostaque being distracted by a secret project that he did not inform Hodes about: Stable Diffusion.
Stable Diffusion is the backbone of text-to-image generation, both referring to the process that was used to create image generation (diffusion) and the company that made its development possible (Stability AI). This product, which rivals OpenAI’s DALL-E and Midjourney, has made Stability AI a household name. But Hodes claims Mostaque kept the project secret so that he would think his stake was basically worthless, allowing him to part with it for much less than its value.
“This was corporate greed at its worst,” said Hodes’s lawyer Avi Weitzman in a statement to ARTnews. “We look forward to a full airing of Defendants’ wrongdoing in Court.”
“The suit is without merit and we will aggressively defend our position,” wrote a Stability AI spokesperson to ARTnews.
This is not the first time the young start-up has been embroiled in legal action. Earlier this year, artists filed a class action lawsuit against Stability AI and other companies, accusing the companies of using their copyrighted images to train image-generation models.
Update 7/14/2023 8:45 AM: This article has been amended to include a statement from Stability AI.