Stability AI co-founder says he was tricked into selling stock for $100

A second person claiming to be the co-founder of generative AI startup Stability AI has sued the company and its CEO Emad Mostak in a lawsuit involving allegations of fraud and embezzlement.

Artificial intelligence entrepreneur Cyrus Hodes filed a lawsuit Thursday in the United States District Court for the Northern District of California. Just months before Stability AI raised more than $100 million at a $1 billion valuation from venture capital firms Coatue and Lightspeed in August 2022, he said he received a 15% stake in the company from Mostak. Claims to have been misled into believing it was “worthless”. The company is best known for his association with Stable Diffusion, a viral text-to-image generative system, but he has since emerged as one of the major public faces of the generative AI boom. I’m here.

In the lawsuit, Hodes said he sold his shares to Mostak for $100 in two transactions, one in October 2021 and one in May 2022. In doing so, he claims he was “fraudulently defrauded” of shares that were valued at $150 million within months. An undiluted base, as Mostak withheld information about its planned venture to pivot to aggressive fundraising attempts and AI-powered text-to-image generation.

The lawsuit also accuses Mostak of destroying evidence after being notified of possible legal action by Hodes’ lawyers in December 2022. Twitter post He complained that his “WhatsApp was deleted,” but the complaint alleges this was intentional.

Avi Weitzman, a partner at the law firm Paul Hastings and representing Hodes, described the operation as a “shocking fraud.” forbes. “This was corporate greed at its worst. We look forward to seeing the defendant’s misdeeds fully televised in court,” he wrote.

Stability AI was unable to provide comment at time of publication.

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The complaint also alleges that Mr Mostak “embezzled funds” from outside investors to pay for the rent of a family-owned London apartment and for his children’s education. The newspaper quoted an unnamed “former investor in one of Mostak’s businesses” who revealed to Weizmann that Mostak “has a pattern of defrauding investors and misappropriating investor and company assets for personal use.” ing. The complaint also alleges that Mostak himself admitted to Hordes that he personally used “company funds” from Trinity Challenge, an organization that provides grants to health-related projects in 2021.

forbes Earlier, several Stability AI employees expressed concern that tens of thousands of dollars were transferred from Stability AI’s corporate account to the personal bank account of Mr. was reported to have been Company spokesman Motez Bishara said the couple had taken out loans to the company at the time, and that the amount they had to pay or had to pay was paid off by the end of 2022. rice field.

Hodes was an early collaborator with Mostak on the business idea of ​​using artificial intelligence to help government agencies deal with the COVID-19 pandemic. He appears with Mostak at the project launch virtual event on YouTube. However, the business did not take off and was discontinued the following year. “A lot of people promised a lot, but they didn’t deliver,” Mr Mostak previously said. forbes. Hodes’ lawsuit alleges that the primary reason for the project’s failure was that Mostak “covertly diverted” his attention and company resources to Stability’s AI image generation efforts.

The lawsuit bears similarities to another lawsuit against a startup best known for its viral text image generation system Stable Diffusion. In May, Tayyab Waseem alleged that Mostak had reneged on an agreement to give his co-founder a 10% stake in the company. The lawsuit, first reported by Vice, was voluntarily dismissed by Wasseem on the same day. (Stability AI did not previously comment on the Waseem lawsuit.)

Wasim’s complaint also portrays Hodes as a co-founder of Stability. It contains slides of pitch material on investing in companies. [Mostaque] Established stability.ai with Cyrus [Hodes] It’s based on the premise that the principles he used in emerging markets and technology as a former hedge fund CIO can be used to solve big problems and create enormous value. “