Character.AI could shut down as Disney walks off with its engineers

Character.AI filed for Chapter 11 bankruptcy in a Delaware court on October 12. Chapter 11 lets a company keep operating while a judge oversees how its debts are paid or its assets are sold. Character.AI isn’t trying to rebuild: it wants a court-supervised sale of all or nearly all of its assets, and it estimated both its assets and liabilities at $50 million to $100 million each.

Disney signed on before the filing as the “stalking horse” bidder, the opening offer that every other buyer has to beat. It is offering $20 million for a non-exclusive, perpetual license to parts of Character.AI’s technology. Non-exclusive means Disney can use the tech forever, but so could whoever else buys it. Competing bids are due by November 20, and Character.AI hopes to finish the sale by late November or early December.

The bigger prize appears to be the staff. Disney offered jobs to 66 Character.AI employees, the majority of the workforce, and 56 have already resigned from the startup to join, with 10 more waiting on US work visa updates. The filing puts their annual pay at about $60 million, plus a $30 million retention pool. Disney expects to spend $180 million on pay and retention for this group over three years.

The top hire came first. In September, Disney named former Character.AI CEO Karandeep Anand as its first-ever chief technology officer, reporting to Disney CEO Josh D’Amaro, who has made tech and AI a priority. The hiring came two weeks after Disney laid off several hundred workers, including some in tech.

There is an unusual twist meant to keep the auction fair. If another company outbids Disney for the technology, that winner can interview and make offers to up to 80% of certain employees Disney already hired, with Disney choosing which ones. Experts doubt that moving engineers from one company to another within months is realistic, which suggests the deal would be hard to unwind once done.

This is the part legal experts are flagging. A motion from Character.AI’s own lawyers says Disney required the deal to be completed through bankruptcy because of the startup’s “diminishing cash reserve and significant litigation and regulatory risks.” Disney also drafted a court order that would state the deal is not a merger and that Character.AI keeps responsibility for any legal claims against it.

Those claims are serious. Character.AI has faced lawsuits from families who allege their teenagers were harmed after using its chatbots, along with investigations by regulators, including a 2025 order from the Federal Trade Commission asking it and six other tech companies how they protect minors. It and Google settled several of those child safety lawsuits earlier this year.

The setup is a version of what’s been called a “reverse acquihire”: a buyer hires a startup’s key people and licenses its tech without formally buying the company, which can also avoid a full antitrust review. John Newman, a law professor at the University of Memphis and a former Federal Trade Commission official, said corporate law’s usual safeguards “really weren’t built to guard against” a deal structured this way.

It isn’t Character.AI’s first time, either. In August 2024, Google reportedly paid about $2.7 billion to license its technology and rehire its founders, Noam Shazeer and Daniel De Freitas.

The app is still running, and Character.AI says keeping the experience safe and engaging for users remains a top priority. But the company has also warned that if no bidder agrees to keep the service going, the platform will be wound down, which means switched off.

• Your data isn’t part of Disney’s license. The list of assets in Disney’s bid doesn’t include user data or the Character.AI website. User data can get extra protection in bankruptcy, and what happens to it depends on the final sale.
• Save what matters to you. If you have chats or custom characters you care about, keep your own copies now rather than waiting for a shutdown notice.
• Watch for the sale result. The key dates are November 20 for rival bids and late November or early December for the sale to close.

It’s a steep fall. Three and a half years ago, a $150 million funding round valued Character.AI at $1 billion.