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Co-founder of Stability AI, Worth Billions, Says He Was Tricked Into Selling Stake for $100 (semafor.com) 93

Posted by msmash from the sad-state-of-affairs dept.
Stability AI is being sued by a co-founder, who claims he was deceived into selling his 15% stake in one of the hottest startups in the sector for $100 to CEO Emad Mostaque, months before the company raised millions at a $1 billion valuation. From a report: Cyrus Hodes accused Mostaque, who is also named in a lawsuit filed in a U.S. federal court on Thursday, of convincing him that Stability AI was worthless and hiding the company's work on what became the popular image generator, Stable Diffusion. Hodes, also a co-founder of blockchain AI startup AIGC Chain, said he sold his entire Stability AI stake in 2021 and 2022, after which the business raised $101 million in a seed funding round. More recently, it was seeking to raise money at a $4 billion valuation.
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Co-founder of Stability AI, Worth Billions, Says He Was Tricked Into Selling Stake for $100 More

Co-founder of Stability AI, Worth Billions, Says He Was Tricked Into Selling Stake for $100

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  • Greed (Score:5, Insightful)

    by mspohr ( 589790 ) on Thursday July 13, 2023 @01:41PM (#63683091)

    Rich people think they are smarter and better than everyone else.
    They're just greedier and more willing to exploit others.

    • Re: (Score:1)

      by Tablizer ( 95088 )

      > Rich people think they are smarter and better than everyone else. They're just greedier and more willing to exploit others.

      They are smarter and better at tricking and exploiting others. A "handy" mutation removed their caring lobe, and the gene got spread to the next generation. It's similar to how blood-sucking leaches evolved.

      • Re: (Score:2)

        by narcc ( 412956 )

        They are smarter and better at tricking and exploiting others.

        This implies that everyone else is trying to trick and exploit others, but aren't as capable, which I don't think is true. Most people try to act honestly and fairly.

        I used to say that most business owners are only business owners because they are too stupid to know that they shouldn't own a business. According to the US Bureau of Labor Statistics, ~45% of businesses fail in the first five years, a figure that jumps to 65% after 10 years.

        • Re: (Score:2)

          by Tablizer ( 95088 )

          > This implies that everyone else is trying to trick and exploit others

          No, but roughly 3% of the population are sociopaths.

          > ~45% of businesses fail in the first five years

          I don't believe this necessarily corresponds with sociopathic behavior. I attempted a couple of businesses myself that failed. I knew I was taking a risk, that's what entrepreneurs do.

        • Comment removed based on user account deletion
    • There has never been, nor will there ever be, any society, or indeed any species of life form, that is not driven forward by advantage, greed and exploitation. It's pointless to be aggrieved over your position, as long as you have equal opportunity. Altruism is great to a point, up until it becomes self-destructive and life moves on ungratefully without you.

      • The problem is that capitalism forecloses "equal opportunity".
        The 1% run everything. We are just renting space at ever greater cost.

        • You get the same problem under other -isms though. The problem isn't private ownership (if anything private ownership is part of the solution), the problem is unchecked concentration of wealth and power. If your proposed solution is that "the state" owns everything you'll end up with an even worse situation where perhaps statesmen don't technically own the things they control but control them they do and rising up is not allowed.

    • In capitalism, this qualifies as "smarter".

  • It's weird (Score:1, Funny)

    by algaeman ( 600564 )
    It's weird how nobody ever complains about how they were "tricked" into buying an asset for $100 that they are then able to sell for $100 million.

    • Re: (Score:2)

      by Entrope ( 68843 )

      Who would complain about that? Who would consider that being "tricked"?

    • Re: (Score:2)

      by tragedy ( 27079 )

      It's weird how nobody ever complains about how they were "tricked" into buying an asset for $100 that they are then able to sell for $100 million.

      It's hardly the same thing. Generally, anyone selling assets for $100 that increase a million times in value are selling those assets at a time when the future value of the asset is uncertain and the value of the asset may just as easily drop. In this case, the person doing the selling does not have future knowledge of the value of the asset, or has knowledge that is incorrect. Meanwhile, the person doing the buying is being accused of not only having that knowledge, but of concealing it when they had a fid

  • Worth is in the eye of the buyer and seller (Score:5, Insightful)

    by haggie ( 957598 ) on Thursday July 13, 2023 @01:46PM (#63683099)

    If you are the founder of the company and don't have any idea of its value or the market potential, you deserve to get scammed out of your company.

    • Re:Worth is in the eye of the buyer and seller (Score:5, Insightful)

      by Frank Burly ( 4247955 ) on Thursday July 13, 2023 @02:11PM (#63683169)
      Arguably true if you think that all increases in value come from labor. But we don't live in a communist utopia. In most ventures, the CEO has a duty to investors, and co-investors a duty to each other. I haven't read beyond the summary, but if the guy you trust to run the business falsely says that things are winding down, you shouldn't be penalized for believing him.

      • Re: (Score:3, Insightful)

        by Pascoea ( 968200 )
        If someone offered me $100 for something they allege is value-less I'd be asking some serious questions.

        • corollary: i canâ(TM)t bring myself to sell any of my worthless possessions for any amount of money. Why would I sell my ownership of a company for $100, even if it was allegedly worthless? $100 isnâ(TM)t even worth my time to sign the paperwork. I would rather just hold onto the ownership and do nothing with it.

          The only thing I can think of is perhaps that the ownership stake of the cofounder resulted in some kind of debt liability that made the cofounder think it was attractive to sell off.

          Other

          • Re: (Score:2)

            by Pascoea ( 968200 )
            Others have made logical sounding points that it's "cleaner" to wind down a company with fewer shareholders. One less signature needed when they auction off the desks and copy machines.

        • Re: (Score:2)

          by Ichijo ( 607641 )

          Maybe the cofounder offered to sell his stake for $1000 and the buyer talked him down to $100 by telling him it was worthless.

      • Comment removed based on user account deletion

        • Re: (Score:2)

          by tragedy ( 27079 )

          Yeah but natural loss due to not checking his work before believing him, is fair enough. If you gamble on human decency to avoid doing your homework, well you just might lose. Shortcuts don't always work out.

          The question is, what methods are you supposed to use to "do your homework" as you put it? Companies don't have some sort of public API you can consult for this information. What they do have is employees and officers with certain fiduciary responsibilities to report this information to shareholders, members of the board, etc. Asking those people about the health of the company is supposed to be the single, best way to "do your homework". If they lie to shareholders to trick them into selling their shares c

      • Comment removed based on user account deletion
    • No one deserves to be lied to. People are just scum.

      But we are now self identified as civilized, so both sides can argue over it. In the cave man days one of these founders would be already dead.
    • As an investor not in any operational capacity how is one supposed to keep their finger on the pulse of the company? Seems one would be reliant on receiving executive reports. If those reports are all lies that's just fraud. What makes an early investor deserving of fraud compared to anyone else?
      • Comment removed based on user account deletion

        • Re: (Score:2)

          by tragedy ( 27079 )

          Investment has its risks. And others humans are the greatest source of risk around. That's the game.

          So, if I get you to invest heavily in my new company Werobyuandstabyu Inc. (bit of a mouthful, I know, best not to try to say it out loud), then I sneak into your house at night, stab you and steal your stock certificates, keeping your investment money and leaving you with nothing, that's ok? That's just the game? No, I don't think so. It may be a harsh game, but there are rules and boundaries. Company officers lying to investors to get them to sell shares cheaply is against those rules. You can't just thro

        • Fraud isn't part of the game it's cheating the game. Why are you defending fraud and trying to pretend it's a legitimate and fair business practice? This is very strange. The most vicious predators on the planet aren't running AI companies, good grief you are out of touch with reality.

    • Re: (Score:2)

      by cob666 ( 656740 )

      If you are the founder of the company and don't have any idea of its value or the market potential, you deserve to get scammed out of your company.

      I don't know the full story, my comment is based on what little information I have read...

      He may have been one of the founders but he was a minority shareholder and may not have been 'in the loop' regarding R&D that was being done outside the primary scope of what he believed was the companies goals. The courts give minority shareholders a bit more wiggle room regarding major decisions made by the company as a whole. If he was intentionally misled or kept from knowing the potential that other shareh

    • If you are the founder of the company and don't have any idea of its value or the market potential, you deserve to get scammed out of your company.

      From what I gathered from the article their original main product was helping "governments develop faster and better responses to COVID-19 through generative AI".

      My guess is that flopped so he moved onto other startups, then sometime after that the remaining co-founders/employees got the idea for Stable Diffusion and the CEO decided to get his stock on the cheap.

      I get the feeling he didn't contribute much labour to the company or he'd be framing his contribution in years or months, not "countless hours". Th

    • Re: (Score:2)

      by tragedy ( 27079 )

      If you are the founder of the company and don't have any idea of its value or the market potential, you deserve to get scammed out of your company.

      You "deserve" it? Because you were lied to by people who were supposed to tell you the truth, but didn't? So, if you ran a company and your accountant kept two sets of books, one with the real numbers and another with fake numbers and the difference has been going into their bank account for years, you "deserve" it when they use the money they've been embezzling to buy the company from itself at a rock-bottom price? You were supposed to magically know how the company was really doing and act according to th

    • If you are the founder of the company and don't have any idea of its value or the market potential, you deserve to get scammed out of your company.

      Welcome to the Capitalist class fellow pig. Let's go find some more "deserving" people to take stuff from.

  • With all due respect (Score:5, Insightful)

    by Whateverthisis ( 7004192 ) on Thursday July 13, 2023 @02:07PM (#63683161)
    $100 isn't worth that much anymore. If you founded an AI startup, you have the skills to earn that in 2 hours of work.

    So why would you sell your stake for $100? He didn't need the money. For that low a price he should have immediately been suspicious.

    • Re: (Score:2)

      by Hodr ( 219920 )

      My thoughts too. The only reason I could think of to sell it that low would be to claim capital losses.

      • You can't even do that as a co-founder. I have helped start several companies as an adviser. FOunder's shares are common, the last to the trough in a liquidation; not great. But the biggest advantage to them is that you give them to yourself when the company is worthless. You then record them as income under what's called an 83(b) election which, simply put, means you're declaring it to the IRS as income of $0 worth of shares and pay no taxes. Then if you're company exits 5 years later and you make som
    • I was wondering why take the deal for $100 if you aren't completely destitute and reliant on that $100 for your next few meals. Was he relieved of possible liability on debts by selling out? Was that just a move to cut losses?

      • There are people who sell crap online for 5 bucks or something like that. Mostly useless stuff, I wouldn't bother with the effort, but some people do. Five bucks from this, five bucks from that, suddenly you end up with thousands of dollars.
        And no, those people are not destitute or reliant on five bucks.
        Between a selling value of zero and a selling value of $100, I'll pick the latter.

        So the problem is not "why would he sell?", but rather "what information has he received to decide selling at that price?"

        • Re: (Score:2)

          by Pascoea ( 968200 )

          There are people who sell crap online for 5 bucks or something like that.

          Idk who cracks me up more, the people that sell $5 shit online, or the people that buy it. Unless you're across the street from the seller you've already burned $5 in gas just to pick it up.

    • Re: (Score:3)

      by Pascoea ( 968200 )
      Exactly this. "Hey, this thing you own is worthless. I'll give you $100 for it." Yeah, that's not fishy at all.

    • Re:With all due respect (Score:5, Interesting)

      by vux984 ( 928602 ) on Thursday July 13, 2023 @02:42PM (#63683261)

      There's lots of very normal reasons for this.

      It likely wouldn't have been for the money.

      It probably would have been as a favour / and for some book keeping/ tax advantages.

      It costs money to setup a company, and worthless companies are worth a few bucks simply because they already exist; so if you and some partners tried a startup and it didn't work out, the defunct but still extant company is worth a couple grand simply because it's incorporated and registered etc, it likely already has some bank accounts setup. It may even have some credit history and access to credit, a phone number, a domain name, mail routing, etc, etc.

      So if you've got shares in one and its 'done', and your partner says, hey I'm thinking of starting a new venture; can you sell me your shares and save me having to spin up a new company? If the venture is dead then there's no real point to hanging onto your 15% of it. The $100 lets you realize your previous investment losses and take the tax advantage from that.

      The person(s) buying them ends up with a company shell that's "ready to go", and save a few grand on lawyers for incorporation, shareholders agreement, and other setup, etc.

      It happens all the time.

      If that's how it was pitched to the partner, then yeah he got tricked, but also not really. For example, if he'd refused to sell his 15% its entirely possible the CEO would have just spun it up into a new company instead in a case like I described above. On the other hand, if the shareholder's original 15% investment was used to create the IP, and then the CEO lied and said it didn't work out and pretended it was dead then, bought him out on false pretenses then... yeah... that's probably fraud.

      • Re: (Score:2)

        by cob666 ( 656740 )

        If that's how it was pitched to the partner, then yeah he got tricked, but also not really. For example, if he'd refused to sell his 15% its entirely possible the CEO would have just spun it up into a new company instead in a case like I described above. On the other hand, if the shareholder's original 15% investment was used to create the IP, and then the CEO lied and said it didn't work out and pretended it was dead then, bought him out on false pretenses then... yeah... that's probably fraud.

        It could be that the aggrieved party had some claim to the IP that was used in the AI and spinning off a new company could have opened them up to possibly more litigation. Getting the shareholder to relinquish any claim to the company would be a good way to get hold of any IP that was developed for the initial venture.

        • Re: (Score:2)

          by vux984 ( 928602 )

          Absolutely; and that's the crux of the whole case: whether there was valuable IP in that company that was used after he unloaded his shares, and exactly what the CEO represented to him to get him to unload them.

      • If any of the scenarios you posit are true, then the co-founder who made the sale is a liar who made a bad deal and is trying to get take-backs for his bad move. Tax write offs, debt acceptance etc., all have "value" even if it's not cash, which means he received more than $100 that he's claiming and is thus just trying to go back on a bad deal.

        Either way, it all comes down to the reps and warranties in the deal. If he sold them without a contract, then it's he-said she-said and which means it's an uph

        • Re: (Score:2)

          by vux984 ( 928602 )

          He's not a liar.

          If you sell something for $100 and it realizes (finalizes) a $50000 loss you can use to offset capital gains somewhere else, its still a $100 sale, and a 50k loss. That's not a situation anyone wants. The tax advantage is just making the best of a bad situation. Reducing a tax hit by 15000 on something you made money is not worth losing 50000 in capital somewhere else to do it. Its just the best way to handle a bad situation.

          Now sure if its hollywood accounting and he took a 50k loss because

          • I'm well aware of the tax opportunities by recognizing a loss. But that's a scenario you're creating in your head and highly unlikely. The entire economic incentive (not the mission incentives or various other reasons to found a company) behind starting a company and being a founder is to issue yourself shares at $0 value, claim the income under an 83(b) election and let it grow as cap gains. There's many tax savings if you exit a company with founder's shares for this very reason.

            So if he truly is a

            • Re: (Score:2)

              by vux984 ( 928602 )

              "If he gave himself his founder's stake at a value of $50,000, he'd have to claim income on that and pay income tax."

              Sure if he valued the his stake at 50k and just gave it to himself, and nobody would do that unless they had to, I agree.

              But if he put 50k into the company as seed money or something, and the company goes to zero, then he most definitely lost 50k.

              The article says "founder", but he didn't seem involved enough in the day to day operations to have any idea what the company was doing - so i didn'

    • Over two years!

      "Hodes, also a co-founder of blockchain AI startup AIGC Chain, said he sold his entire Stability AI stake in 2021 and 2022... ...Those transactions should be rescinded and Hodesâ(TM)s ownership interest in Stability AI restored."

      This isn't about the sale, the money wouldn't probably cover the bill for the restaurant where they met, possibly not even for fast food if there were more than 2-3 transactions, and for sure it wasn't worth going through the paperwork.

    • It would be less odd if it were $1, the accepted token value for a neutral exchange.

    • If you founded an AI startup, you have the skills to earn that in 2 hours of work.

      I wouldn't assume that he has any skills at all. He's a wagon-jumper, hoping to get rich off of the latest buzzwords, who apparently had so little involvement with the company that he founded that he didn't even know the status of its principle product.

    • Well, in all fairness, he thought the magical beans he traded it for were worth more than just 100 bucks.

    • I agree, this decision made so little sense that I can only conclude the guy deserved the consequences.

  • Not saying any (alleged) trickery to get his 15% share was ethical, but if he needed that $100 so badly and wasn't willing to lose it on this, he probably shouldn't have been investing in a startup anyway. Obviously, the billions it's reportedly now worth would help too. :-)

    • Re: (Score:3)

      by PPH ( 736903 )

      but if he needed that $100 so badly

      Sounds like drugs.

      Let this be a lesson, kids.

  • Who would sell a 15% stake in a fledgling company for $100, regardless of how it looked? And what kind of co-founder has no idea how well his company is doing? There was no injustice here.

  • Clear case of fraud? (Score:5, Interesting)

    by ranton ( 36917 ) on Thursday July 13, 2023 @02:30PM (#63683225)

    IANAL, but this sure sounds like Pre-IPO fraud. Usually the fraud is to increase the valuation by fraudulent methods before an investment is made, but in this case it was to lower the valuation so a purchase could be made. Either way if the CEO lied about the company's value to lower the purchase price that seems like fraud to me. Bring on the criminal charges.

    • IANAL, but this sure sounds like Pre-IPO fraud. Usually the fraud is to increase the valuation by fraudulent methods before an investment is made, but in this case it was to lower the valuation so a purchase could be made. Either way if the CEO lied about the company's value to lower the purchase price that seems like fraud to me. Bring on the criminal charges.

      Definitely, though the only difference between this and putting a bunch of devalued startup shares into a tax-free retirement account [nbcnews.com] is this guy defrauded another investor instead of the federal government. Of course, rich guys are generally allowed to cheat on their taxes.

  • Sounds like ge got played by someone more exploitative than he is. Rich people gonna rich, amirite?

  • Turns out this guy's name is actually Cyrus Hodes, not Worth Billions as the headline suggests...

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