Character.AI Files for Chapter 11 Bankruptcy as Disney Leads $20M Asset Auction

What happened

Per TechCrunch's Oct 13 report, Character.AI's board determined the court-supervised sale 'provides the Company with the best opportunity to maximize value for all stakeholders.' Disney will also provide transition services through former Character.AI employees who joined the entertainment giant last month alongside former CEO Karandeep Singh Anand.

Current CEO Colin Adams said the company will keep operating during the sale, expected to close in late November or early December, while writing: 'We hope that the sale process will yield an actionable proposal that will allow continued operations of the Character.ai platform. If such a bid is unavailable, however, the platform will be wound down.'

Latest developments

On Oct 14, the US bankruptcy court in Wilmington, Delaware held Character.AI's first hearing. Per Reuters, 40 state attorneys general urged Judge Brendan Shannon to keep young users' chat data safe during the bankruptcy.

1. States' ask: Attorney Abigail Ryan told the court the states are negotiating a settlement with Character.AI over allegations that its chatbots impersonated licensed medical professionals and exposed children to sexualized and abusive interactions; the states want any buyer to protect chat histories and improve safety features.
2. NY AG's statement: Letitia James said in a statement before the hearing: "This company has collected some of the most private thoughts children have ever shared, and now those conversations could be sold off to the highest bidder."
3. No data buyer yet: The company's attorney Erin Fay said she heard the concerns "loud and clear," but no buyer has yet bid for user data or the operating chatbot business.
4. Disney deal details: Disney has agreed to pay $20 million to license the technology and IP and is hiring most of the company's staff; Disney is not interested in the user data the AGs are concerned about. The deal needs court approval and is subject to higher bids.
5. Losses and investigations: The company says it was losing $8–9 million a month before filing, citing legal expenses and the high cost of compute and AI talent; it also faces investigations by the US federal government and authorities in the UK, Italy, Russia and Australia, and has reached preliminary settlements with five families who sued.

On October 18, TechCrunch reported that a legal filing spotted by Bloomberg disclosed new details of the Disney–Character.AI agreement: Disney agreed to extend employment offers to at least 60 Character.AI employees — the majority of its workforce — with estimated annual compensation of $60 million; the filing says the "vast majority" of those offered accepted. However, this remains a stalking-horse bid, so another company can still make a higher offer.

Key facts

1. Five-year arc: Founded in late 2021 by Transformer paper co-author Noam Shazeer and Daniel De Freitas; unicorn in Sept 2022 on a $150M raise; in Aug 2024 Google struck a $2.7B licensing deal and both founders returned to Google.
2. Lawsuit headwinds: After a 14-year-old Florida boy's suicide, his mother sued alleging he became obsessed with a platform chatbot; Texas launched an investigation. The company settled some suits, added safety features and banned minors.
3. Funding and users: Per PitchBook the company raised over $193M from investors including Lightspeed, SV Angel, Greycroft and a16z; monthly active users hit 20M in Oct 2024.