Stability AI Co-Founder Sues CEO over Alleged Fraud after Selling Stake for $100

Hodes claims that Mostaque convinced him that Stability AI was "essentially worthless," even as CEO Mostaque was already working on what would become Stable Diffusion.

Cyrus Hodes, a co-founder of the artificial intelligence startup Stability AI, has filed a lawsuit against the company and its CEO, Emad Mostaque. The lawsuit alleges that Mostaque deceived Hodes into selling his 15% stake in the company for a mere $100, just months before the company achieved a $1 billion market valuation. has responded to the lawsuit saying, “The suit is without merit and we will aggressively defend our position.”

Allegations of Misrepresentation and Embezzlement

Stability AI develops and sells artificial intelligence (AI) solutions for various domains, such as healthcare, , finance, and entertainment. One of their flagship products is , a tool that uses a novel technique to create images from text descriptions. They also offer DreamStudio, a premium imaging application that allows users to tap into the power of Stable Diffusion to create new and unique designs, and Clipdrop, which is an AI-centered ecosystem of apps, plugins, and resources for creators.

Hodes claims that Mostaque convinced him that Stability AI was “essentially worthless,” even as Mostaque was working on what would become Stable Diffusion. The lawsuit further accuses Mostaque of embezzling funds from external investors for personal use, including paying rent for his family's London apartment and his children's schooling.

The lawsuit also alleges that Mostaque misled Hodes about the intended use of purchased Tensor Processing Units (TPUs), claiming they were for a climate change AI program, while they were actually used to enhance for a text-to-image generator. Hodes further accuses Mostaque of intentionally deleting his account to destroy evidence that would have been highly favorable to Hodes and detrimental to Mostaque's defenses.

Hodes Seeks Restoration of Stake and Punitive Damages

Hodes is seeking the restoration of his 15% stake in Stability AI, plus punitive damages for the alleged fraud and Mostaque's alleged breach of fiduciary duty. He alleges that he was “fraudulently cheated” out of equity that would have been worth $150 million on an undiluted basis.

This is not the first time Stability AI has faced legal action. In May, Tayab Waseem claimed that Mostaque reneged on an agreement to grant him a 10% co-founder stake in the company.

Stability AI: Recent Developments

On May 12, 2023, Stability AI, a leading open-source generative AI company, launched its Stable Animation SDK. This innovative tool allows developers to create and animate 3D models using natural language commands. The SDK is powered by Stability AI's flagship model, Stable Diffusion, a text-to-image generator that can produce realistic and diverse images from any text input.

On May 18, 2023, Stability AI introduced StableStudio, an open-source version of its popular DreamStudio web app. StableStudio allows users to create realistic and artistic images from text prompts, using Stability AI's state-of-the-art image generation model, Stable Diffusion. StableStudio aims to be a platform for open-source collaboration and experimentation with generative AI.

On July 22, 2023, Stability AI, in partnership with its CarperAI lab, introduced two innovative large language models, FreeWilly1 and FreeWilly2. These models, now accessible for non-commercial use, have shown remarkable performance across a variety of benchmarks, securing leading positions on the Hugging Face Open LLM Leaderboard.