AI Startup Character.AI Files for Bankruptcy and Agrees to Disney Asset Sale

Character.AI, the artificial intelligence startup founded by AI researcher Noam Shazeer and his partner Daniel De Freitas, has filed for Chapter 11 bankruptcy protection in the United States.

At the same time, the company announced it has reached a preliminary agreement to sell some of its assets to entertainment giant Disney for $20 million, as reported by Reuters and other outlets. This is an extraordinary turn of events for a company that just two years ago was at the center of a roughly $2.7 billion deal with Google and was considered one of the most prominent promises of the artificial intelligence industry. Now, the company that pioneered chatbots allowing conversations with virtual characters faces the possibility of shutting down operations if no buyer steps forward to keep the platform running.

According to court documents, Character.AI reported estimated assets and liabilities of $50 million to $100 million each. Under the proceedings, the company seeks to sell assets, including licenses to use part of its intellectual property. Disney will serve as the stalking-horse bidder, whose $20 million offer will set the baseline price in an auction, though other competitors may submit higher bids. The company expects the sale process to conclude in late November or early December 2026. In the meantime, it intends to keep operating the platform and minimize service disruptions for users.

Google Paid Billions to Buy Back the Founder

Character.AI was founded in 2021 by Shazeer and De Freitas, two AI researchers who left Google. Shazeer is considered one of the most influential researchers in the field, partly due to his role in co-authoring the foundational 2017 paper "Attention Is All You Need," which introduced the transformer architecture that underlies most advanced language models today, including ChatGPT, Gemini, and Claude. The company developed by the pair allowed users to hold conversations with AI-driven virtual characters, including fictional, historical, and user-created figures. The platform gained widespread popularity, especially among young users, and became one of the companies associated with the first wave of consumer AI applications.

Throughout its operations, the company raised about $193 million from investors, including Andreessen Horowitz. In March 2023, the company was valued at approximately $1 billion.

In the summer of 2024, Google executed an unusual move to bring Shazeer back into its fold. In a deal valued at about $2.7 billion, the tech giant acquired a license to use Character.AI's technology and hired the two founders along with about thirty employees. The transaction was not a full buyout of the company, but an arrangement granting Google access to the technology and key personnel, while Character.AI continued to operate independently. The move was considered one of the most expensive talent acquisition deals in Silicon Valley history, illustrating the fierce competition among tech giants for top AI researchers worldwide. However, this past June, Shazeer left Google as well and joined OpenAI, where he works on developing new architectures for AI models. This completed another move between competing companies vying for industry leadership, leaving the company he founded to operate without its original founders.

The Future of the Platform Remains Uncertain

The bankruptcy filing also follows Character.AI's struggles with legal lawsuits concerning platform safety. Lawsuits alleged that conversations with the company's chatbots contributed to psychological harm among minors. The company reached legal settlements in some of the proceedings. According to CEO Colin Adams, after reviewing available alternatives, the board concluded that a court-supervised asset sale is the best way to maximize value for stakeholders.

At this stage, it remains unclear exactly which assets Disney will acquire if its offer is approved, and what the implications will be for platform users. The company clarified that if the sale process does not yield a buyer willing to continue operating the service, its operations will be shut down. The collapse of Character.AI illustrates the potential gap between the valuation attributed to technology and the researchers who develop it, and the ability to build an independent, sustainable business around it. In Character.AI's case, the multi-billion-dollar deal with Google did not include acquiring the company itself, and now, about two years later, it is forced to turn to court to settle its debts and sell its assets.