Legal Battle Erupts in the AI World: Stability AI Co-Founder Sues Over Alleged Deception and Fraud

Web of deceit and billion-dollar stakes, a co-founder sues AI startup Stability AI, triggering a legal war that could change the face of tech entrepreneurship.

Legal Battle Erupts in the AI World: Stability AI Co-Founder Sues Over Alleged Deception and Fraud

Artificial intelligence startup, Stability AI, and its chief executive are facing legal scrutiny from one of their co-founders, in a lawsuit that challenges the ethical conduct of the burgeoning tech industry. The legal action is predicated on allegations of fraud and deception, where the plaintiff, Cyrus Hodes, argues that he was manipulated into undervaluing and selling his significant stake in the company just before it achieved significant market success.

Cyrus Hodes' Allegations

Co-founder of Stability AI, Cyrus Hodes, has brought forth a lawsuit in the San Francisco federal court against the company and its CEO, Emad Mostaque. According to the filed complaint, Hodes accuses Mostaque of convincing him that Stability AI was "essentially worthless", at a time when Mostaque was actively developing Stable Diffusion, an image generator that eventually contributed significantly to the company's success.

Hodes also alleges that the company did not disclose ongoing discussions with venture capital firms prior to Mostaque's purchase of his 15% stake between October 2021 and May 2022.

"Mostaque's conduct epitomizes corporate greed at its worst and simply shocks the conscience," the complaint reads.

Hodes is now seeking to have his 15% stake restored, alongside punitive damages for the alleged fraud and breach of fiduciary duty.

Stability AI's Response and Company Profile

Stability AI, in an official statement, dismissed the allegations:

"The suit is without merit and we will aggressively defend our position."

The London-based firm, which refers to itself as the "world's leading open source generative AI company," last August secured $101 million in financing, leading to a valuation of $1 billion. The company recently sought further funding at a $4 billion valuation.

Hodes, a globally recognized authority in artificial intelligence, has notably worked as an adviser to the United Arab Emirates and as a program director at Harvard University's John F. Kennedy School of Government. His complaint highlights his dedication to Stability AI, where he spent "countless hours" since early 2020, including his involvement in a project aimed at aiding governments to respond swiftly to the COVID-19 pandemic.

This lawsuit is not the only legal trouble that Stability AI is currently embroiled in. Earlier this year, the stock photo provider, Getty Images, approached a London court to stop Stability AI from selling its image-generation system in Britain, citing allegations of copyright violations.

Financial challenges have also been reported. Bloomberg News revealed that Stability AI recently managed to raise less than $25 million in a convertible note offering, after experiencing difficulties in raising money at its sought-after $4 billion valuation.

The case, Hodes v. Mostaque et al, continues to unfold in the U.S. District Court, Northern District of California, with case number 23-03481. As it develops, this legal battle is expected to have significant implications on corporate governance within the rapidly advancing world of artificial intelligence.

Read next