Stability AI cofounder dumped his entire stake for a mere $100 just months before company hit a $1 billion valuation

Stability AI founder Emad MostaqueCourtesy of Stability AIThe cofounder of Stability AI dumped his stake for $100 just months before the company hit a $1 billion valuation.

Cyrus Hodes says he was tricked by the company's CEO into believing his shares were "worthless."

The firm has sought a $4 billion valuation more recently, and Hodes' shares would have been worth over $500 million on that basis, he said in a lawsuit.

The smashing success of ChatGPT helped ignite a stunning surge in AI-focused stocks this year, adding billions of dollars to the wealth of tech entrepreneurs like Nvidia CEO Jensen Huang.

But not everyone has had the same luck.

The cofounder of artificial-intelligence startup Stability AI took a massive notional loss — when he dumped his 15% stake for a mere $100 just months before the company hit a $1 billion valuation.

And he hasn't taken it lightly.

Cyrus Hodes has struck legal action against Stability AI's CEO Mohammad Emad Mostaque and the company this month, arguing he was tricked into thinking his stake in the generative AI company was "worthless."

"Specifically, in October 2021 and May 2022, Mostaque purchased from Hodes his entire 15% stake in Stability AI for only $100.00, having led Hodes to believe that the company he had helped build was essentially worthless," the lawsuit said.

"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," he added.

"More recently, the company has been in the marketplace seeking funding at a valuation of $4 billion. At that valuation, the shares that Mostaque purchased from Hodes for a mere $100.00 would have a market value of over half a billion dollars (on an undiluted basis)," according to the lawsuit.

The suit is "without merit" and Stability AI will "aggressively defend our position," the company said in emailed comments.

Stability AI, which is known for developing the open-source, text-to-image generator Stable Diffusion, was founded in 2020 and quickly rose to fame for its text-to-image product. It's also been riding the high wave amid the recent investor frenzy over artificial intelligence, but Mostaque has shut down the hype, predicting AI will be "biggest bubble of all time."

Alongside fraud claims, Hodes also baited Mostaque for allegedly embezzling funds from Stability AI "to pay for the rent for his family's lavish London apartment." He further added in the lawsuit that Mostaque has had a long history of "cheating investors" in past ventures.

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