Cyrus Hodes, a co-founder of generative AI startup Stability AI, has filed a lawsuit against Stability AI and its CEO, Emad Mostaque, alleging fraud and embezzlement. The AI entrepreneur lodged the lawsuit in the U.S. District Court for the Northern District of California, asserting that Mostaque misled him regarding the value of his stake in the business. The legal action comes after Stability AI raised over $100 million in a funding round last year, catapulting it to a valuation of $1 billion.
Cyrus Hodes is a co-founder of AIGC Chain, (the first foundation model of AI-generated content on a blockchain, with a responsible AI focus), the co-founder of Stability AI (exited), and a co-founder of Duckweed Bio, a Florida Agtech/Climate Tech venture. He is a Contributor to VALDI.ai, a web3 P2P ML cloud computing platform. Cyrus is a member of the Steering Committee of AI Commons (Responsible AI Lead). He was a Partner at FoundersX Ventures, a cross-stage Silicon Valley VC, and the co-founder of the AI Initiative of The Future Society, where he led global governance of AI projects such as the Global Data Access Framework.
Allegations of misrepresentation and undisclosed value
According to the lawsuit, Hodes claims that Mostaque deceived him into believing that his 15% stake in Stability AI was worthless, only to raise over $100 million in funding just months later. The suit alleges that Mostaque intentionally withheld information about active fundraising attempts and the company’s planned pivot into AI text-to-image generation. Hodes sold his stake to Mostaque for $100 in two transactions, and he now argues that he was fraudulently cheated out of equity that would have been worth $150 million on an undiluted basis.
Destruction of evidence and corporate greed
The legal action further accuses Mostaque of destroying evidence after being notified of potential legal action, claiming that his deliberate deletion of WhatsApp messages was intentional. The lawsuit also alleges that Mostaque embezzled funds from external investors to cover personal expenses such as rent and schooling. A former investor in one of Mostaque’s businesses reportedly disclosed a pattern of misappropriating investor and company assets for personal use. The suit also highlights Mostaque’s acknowledgment in 2021 of improperly using company funds obtained from the Trinity Challenge for personal use.
The lawsuit references Stability AI employees voicing concerns about significant sums of money being transferred from corporate accounts to the personal bank account of Mostaque’s wife, who served as the company’s former head of PR. Stability AI maintains that these transactions were loans made by the couple to the business and have been settled. The legal action contends that Mostaque secretly diverted attention and company resources from a failed AI project focused on addressing the Covid-19 pandemic to Stability AI’s AI image generation efforts.
Previous lawsuit and claims of co-founder status
The lawsuit filed by Hodes bears similarities to a previous case against Stability AI, where Tayab Waseem claimed that Mostaque reneged on granting him a 10% co-founder stake. Notably, Hodes is portrayed in Waseem’s complaint as a co-founder of Stability AI, citing a slide from a company investment pitch deck that emphasized the collaboration between Mostaque and Hodes based on their shared vision.
The lawsuit against Stability AI and CEO Emad Mostaque by Cyrus Hodes presents serious allegations of fraud and embezzlement. The legal action challenges the representation of Hodes’ stake in the company and accuses Mostaque of misappropriating funds, destroying evidence, and diverting attention from previous AI projects. These developments cast a shadow over Stability AI, which gained recognition for its association with the viral text-to-image generation system Stable Diffusion. As the case unfolds, it will shed light on the claims of financial misconduct and provide further insights into the operations of Stability AI.
Note: Cryptopolitan received a communication from a Stability AI Spokesperson with the comment,
“The suit is without merit and we will aggressively defend our position.”
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