The co-founder of Stability AI sued this company, stating that manipulation was used against him, containing deception at its core, because of which he was forced to sell his stake in the company for $100.

Cyrus Hodes claims that he was forced to sell a stake in a British startup specializing in artificial intelligence developments a few months before the value of Stability AI rose to $ 1 billion. He said that sold the company’s shares belonging to him to another co-founder, Emad Mostaque. Cyrus Hodes performed this commercial action within the framework of two transactions in October 2021 and May 2022. Emad Mostaque was sold a 15% stake in the company. The relevant information is contained in the federal lawsuit, which on Thursday, July 13, was filed in a court located in San Francisco.

The plaintiff claims that Emad Mostaque convinced him that the startup is of no value from a financial point of view. Whether these statements were purposeful manipulation to obtain benefits or were the result of an erroneous forecast of the company’s future, the court will have to find out.

The lawsuit contains information that in August last year, the startup introduced Stable Diffusion, which is an AI-based tool for creating images. At the same time, the company announced that it had received venture financing for $ 101 million. After that, the startup became one of the leaders in the field of generative artificial intelligence. Based on the analysis of the circumstances and results of the company’s activities after May 2022, when the second sale of Cyrus Hodes’ stake in the firm was implemented, the plaintiff accused Emad Mostaque, who is the chief executive officer of the firm, of violating fiduciary duties.

The lawsuit contains straightforward wording about brazen deception. At the same time, the document claims that Emad Mostaque himself was deceived by an unreliable proxy. At the same time, according to Cyrus Hodes, this fact does not negate the guilt of the startup’s executive director. The plaintiff claims that Emad Mostaque personally developed the company’s business strategy and understood the prospects regarding the possibility of raising financing and the potential growth of the firm’s value.

Stability AI has already commented on this lawsuit, saying that the charges have no justification. The startup also announced its intention to defend its position in the framework of this proceeding.

Emad Mostaque, a former hedge fund employee, registered Stability AI in the UK in 2019. Together with Cyrus Hodes, in 2020, he began working on a project to use artificial intelligence as a tool to combat coronavirus, called CAIAC. As part of this initiative, government agencies were provided with information about Covid-19, which was collected and analyzed using AI. The lawsuit contains information that Cyrus Hodes spent more than $15 000 dollars of personal money to cover expenses incurred as a result of the implementation of this project.

The plaintiff also claims that the deadline for the implementation of the initiative on the use of advanced technology in the field of healthcare was not met because Emad Mostaque secretly used resources to create a text-to-image generator, which was subsequently transformed into a digital product called Stable Diffusion. The startup’s executive director, in turn, says that the project failed as a result of a lack of funding.

Special attention should be paid to the fact that Cyrus Hodes is not the first representative of Stability AI, who has claims to the startup. In May, Tayab Waseem, who said in 2020 was the firm’s chief research officer in the CAIAC project, sued the company and Emad Mostaque. He stated that he was promised a share in the startup, but after raising funding for $ 101 million, it was stated that his activities were carried out voluntarily. This pretext became an explanation for the refusal to fulfill a promise. Tayab Waseem withdrew the claim on the day of filing. Why his intentions changed in the shortest possible time is unknown.

Getty Images also sued Stability AI in January. The company stated that Stable Diffusion used copyrighted images to process its data. The startup has denied these allegations.

As we have reported earlier, SVB Financial Sues to Recover $1.9 Billion From FDIC.