Some early AI startups are already seeing the end of the roads of their journeys.
Character.ai, once one of the most hyped startups of the generative AI boom, has filed for Chapter 11 bankruptcy protection, and has lined up Disney as the lead bidder for a chunk of its assets. Character.ai announced that it has commenced a voluntary Chapter 11 case in the U.S. Bankruptcy Court for the District of Delaware to carry out what it’s calling a “value-maximizing sale” of all or substantially all of its assets. The company says it will keep running its platform while the sale process plays out.
Ahead of the filing, Character.ai entered into an agreement with Disney Worldwide Services, Inc. under which Disney will act as the “stalking horse bidder” for a non-exclusive, perpetual license to certain Character.ai intellectual property and certain company claims. In return, Disney will pay $20 million and provide transition services using former Character.ai employees it has hired, to help the company keep its platform running safely for a limited period while the sale process continues. The deal is subject to higher or better offers under Section 363 of the Bankruptcy Code, meaning other bidders can still outbid Disney before the sale is finalised.
Character.ai has also filed a motion seeking court approval of bidding procedures meant to draw out the highest possible offers for its assets, with Disney designated as the stalking horse purchaser for certain of those assets. Under the timeline proposed in those procedures, the company expects the sale process and the closing of any resulting transactions to wrap up in late November or early December 2026.
From Google Researchers To A Billion-Dollar Startup
Character.ai was founded in November 2021 by Noam Shazeer and Daniel De Freitas, two former Google engineers who had worked together on the company’s LaMDA conversational AI project. Shazeer was an author of the landmark 2017 paper “Attention Is All You Need,” which introduced the transformer architecture that underpins virtually every major AI model today, including ChatGPT. De Freitas had led the development of an experimental Google chatbot called Meena, which later evolved into LaMDA.
The pair reportedly grew frustrated with Google’s reluctance to release its AI chatbot technology to the public, and left to start their own company. Character.ai let users create and chat with customisable AI personas, modelled on everything from historical figures to anime characters to purely original creations, and it launched in beta in September 2022, just months before ChatGPT’s debut reshaped the AI landscape.
The app quickly became one of the breakout consumer AI products of its era. It raised $150 million in a Series A round led by Andreessen Horowitz in March 2023 at a $1 billion valuation, and at its peak the Character.ai web app was drawing roughly 200 million visits a month, with users reportedly spending far longer per session than they did on ChatGPT.
Founders Returned To Google, Lawsuits Piled Up
In August 2024, Google struck a roughly $2.7 billion non-exclusive licensing agreement with Character.ai for its technology, as part of a deal that also saw Shazeer and De Freitas, along with several members of the startup’s research team, rejoin Google to work on its Gemini AI project. Dominic Perella, Character.ai’s general counsel, stepped in as interim CEO. Karandeep Anand, previously of Brex and Meta, later took over as CEO in 2025, before himself departing to become Disney’s first-ever Chief Technology Officer in September 2026.
Through this period, Character.ai was also facing mounting legal and regulatory pressure. The company was sued by the mother of a 14-year-old Florida boy who died by suicide after an extended relationship with one of its chatbots, and by the families of other minors who alleged the platform’s bots encouraged self-harm and other harmful behaviour. Facing scrutiny from regulators and lawmakers over its impact on teenage users, Character.ai announced in late 2025 that it would bar users under 18 from open-ended chats with its characters altogether.
Disney itself had a run-in with the company just last year. In September 2025, Disney sent Character.ai a cease-and-desist letter accusing it of “blatantly infringing” its copyrights by hosting chatbots based on characters like Mickey Mouse and Luke Skywalker, and Character.ai complied by pulling the bots down.
Shazeer, meanwhile, didn’t stay at Google for long either. In June 2026, he announced that he was leaving Google to join OpenAI, ending a second stint at the company that had run barely two years, in a move widely seen as part of the fierce AI talent war currently playing out among the leading labs.
With its founders long gone and its core technology licensed off to Google, Character.ai’s Chapter 11 filing effectively marks the end of the road for the once-$1-billion startup as an independent company, with Disney now positioned to pick up part of what’s left.