Stability AI cofounder sold stake now worth over $500M for $100—after being duped, says lawsuit

Cyrus Hodes alleges that CEO Emad Mostaque deceived him into selling his 15% stake for $100—three months before the startup reached a $1 billion valuation. His stake would be worth over $500 million now.

Mostaque convinced Hodes “that the company he had helped build was essentially worthless,” leading him to sell his shares to him in October 2021 and May 2022, according to a complaint filed in San Francisco federal court on July 13. 

“But just a few months later, in August 2022, the company engaged in a seed funding round in which venture capital firms invested $101 million at a post-money valuation of $1 billion,” the complaint states. “More recently, the company has been in the marketplace seeking funding at a valuation of $4 billion.”

Mostaque’s behavior “epitomizes corporate greed at its worst and simply shocks the conscience,” the complaint states.

Fortune reached out to Stability AI for comment but received no immediate reply.

Stability AI is the company behind Stable Diffusion, an A.I. tool for making digital images. Users type in what they want and the program generates a realistic or surrealistic picture. OpenAI’s Dall-E 2 is a competitor. 

Hodes serves as the artificial-intelligence program director at Harvard University’s John F. Kennedy School of Government. He was previously an adviser to the United Arab Emirates. 

The complaint states that Mostaque, even as he persuaded Hodes that his stake was worthless, worked on Stable Diffusion and held talks with VC firms that he never revealed. Hodes wants punitive damages for the alleged fraud and, unsurprisingly, his 15% stake restored.

“Hodes and Mostaque conceived of Stability AI together, and Hodes spent countless hours working full time to develop, fundraise, market, and advance Stability AI,” the complaint alleged. It added that Hodes worked full time for 18 months to build the business, giving up other opportunities along the way and receiving “de minimis monetary compensation” outside his 15% stake. 

Stability AI also faces legal action from Getty Images. The stock photography company alleged in a February lawsuit filed in Delaware that the startup copied 12 million images (along with the associated captions and metadata) from its database to train its A.I. model without permission or compensation. Getty accused the company of “brazen infringement of Getty Images’ intellectual property on a staggering scale…as part of its efforts to build a competing business.”