Stability AI cofounder duped into selling stake now worth $500M for $100: Lawsuit

A Stability AI cofounder was completely positioned to strike it wealthy within the A.I. growth. He simply didn’t understand it. 

Cyrus Hodes alleges that CEO Emad Mostaque deceived him into promoting his 15% stake for $100—three months earlier than the startup reached a $1 billion valuation. His stake can be value over $500 million now.

Mostaque satisfied Hodes “that the corporate he had helped construct was basically nugatory,” main him to promote his shares to him in October 2021 and Might 2022, in keeping with a grievance filed in San Francisco federal courtroom on July 13. 

“However only a few months later, in August 2022, the corporate engaged in a seed funding spherical during which enterprise capital corporations invested $101 million at a post-money valuation of $1 billion,” the grievance states. “Extra lately, the corporate has been within the market looking for funding at a valuation of $4 billion.”

Mostaque’s conduct “epitomizes company greed at its worst and easily shocks the conscience,” the grievance states.

Fortune reached out to Stability AI for remark however acquired no speedy reply.

Stability AI is the corporate behind Steady Diffusion, an A.I. instrument for making digital photos. Customers kind in what they need and this system generates a sensible or surrealistic image. OpenAI’s Dall-E 2 is a competitor. 

Hodes serves because the artificial-intelligence program director at Harvard College’s John F. Kennedy Faculty of Authorities. He was beforehand an adviser to the United Arab Emirates. 

The grievance states that Mostaque, whilst he persuaded Hodes that his stake was nugatory, labored on Steady Diffusion and held talks with VC corporations that he by no means revealed. Hodes desires punitive damages for the alleged fraud and, unsurprisingly, his 15% stake restored.

“Hodes and Mostaque conceived of Stability AI collectively, and Hodes spent numerous hours working full time to develop, fundraise, market, and advance Stability AI,” the grievance alleged. It added that Hodes labored full time for 18 months to construct the enterprise, giving up different alternatives alongside the best way and receiving “de minimis financial compensation” exterior his 15% stake. 

Stability AI additionally faces authorized motion from Getty Pictures. The inventory images firm alleged in a February lawsuit filed in Delaware that the startup copied 12 million photos (together with the related captions and metadata) from its database to coach its A.I. mannequin with out permission or compensation. Getty accused the corporate of “brazen infringement of Getty Pictures’ mental property on a staggering scale…as a part of its efforts to construct a competing enterprise.”

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