Character.AI Files Bankruptcy as Disney Bids $20 Million
The once-$1 billion chatbot app goes to Delaware court. If no buyer keeps it running, it gets switched off.
Character.AI filed Chapter 11 to sell itself under court supervision. Disney is the stalking-horse bidder at $20 million for a non-exclusive perpetual license to some IP.
Character.AI, the app where millions chat with AI versions of fictional heroes and made-up partners, filed for voluntary Chapter 11 bankruptcy in Delaware on Oct 12. Chapter 11 is a U.S. bankruptcy that lets a company keep running while a judge oversees how it sells assets or pays debts. The company said it wants a court-supervised sale of all or substantially all of its assets. If no bidder agrees to keep the service alive, the platform 'will be wound down'—corporate speak for switched off.
The Disney floor
Disney Worldwide Services signed on as the 'stalking horse' bidder before the filing, according to Character.AI's press release. That opening offer sets a floor other bidders must beat. Disney is offering $20 million for a non-exclusive, perpetual license to some of Character.AI's intellectual property and certain legal claims, plus transition services run by former Character.AI employees it already hired. Non-exclusive means Disney gets to use the tech forever, but so can whoever else buys it. The sale is expected to close in late November or early December.
How a $1 billion chatbot slid here
Founded in 2021 by former Google engineers Noam Shazeer and Daniel De Freitas, Character.AI was once valued at $1 billion after a $150 million round led by Andreessen Horowitz. Google later rehired the founders and part of the team in a roughly $2.7 billion deal that also licensed the tech. Legal headaches piled up: a Florida mother sued, alleging her 14-year-old son died by suicide after becoming attached to a chatbot. More lawsuits followed, and the FTC asked how the company protects minors. Character.AI later banned under-18s from open-ended chats and settled lawsuits in January. Disney sent a cease-and-desist over chatbots imitating Disney characters, and the startup removed them. This past September, Disney named Karandeep Anand, then Character.AI's CEO, as its first CTO.
Financially, the company reported an operating loss of about $8-9 million per month and struggled to raise capital. On Sept 28, it launched two new models and a $4.99 lite subscription. Fourteen days later, it was in bankruptcy court. The app stays online for now; subscriptions and billing are unchanged, and users can export or delete accounts. The company also linked a support page for anyone struggling with the news.
The takeaway: A once-hot AI companion play is now a distressed asset, and Disney's $20 million floor price shows how far the valuation has fallen.
Summary written by Oh Cannot from the original report by Decrypt. Not financial advice.
