Disney expects to spend about $180 million over three years on compensation and retention for the roughly 65 Character.ai employees it has hired, according to a binding term sheet filed today in the US Bankruptcy Court for the District of Delaware. The company those employees left would receive $20 million. The documents, attached to Character Technologies Inc.'s bidding procedures motion, also list what the $20 million buys and what it does not: Disney gets the code behind the chatbot's training, safety and serving systems plus nine patents, while the app, the brand, the user data, the chats and the finished models stay in the bankruptcy estate for anyone else who wants them.

In Short

Disney has hired most of the people who built Character.ai, and the court papers show it plans to spend about $180 million on their pay over three years, while paying the bankrupt company $20 million for a copy of its technology. Disney is not getting the app, its users' data or their conversations, so those remain for sale to someone else. If no other buyer steps in by late November, Disney's deal goes ahead and the app itself is expected to shut down.

What was filed today

The motion, Document 15 in case 26-11603 (BLS), runs to 58 pages and was signed by Erin R. Fay of Wilson Sonsini Goodrich & Rosati as proposed counsel to the debtor. Two exhibits follow it: a 76-page proposed bidding procedures order with the procedures themselves, and a 161-page exhibit containing the Stalking Horse Transaction Agreement between Disney Worldwide Services, Inc. and Character Technologies, a form of sale order, an amended and restated transition services agreement dated October 13, 2026, and the Exclusivity and Prepayment Agreement of September 18, 2026 with its binding term sheet.

The term sheet is the most revealing of these papers. Earlier filings in the case, covered by PPC Land on October 12 and in two follow-ups, described Disney's $20 million offer and the departure of 66 of the company's 86 employees to Disney. None of them put a figure on what Disney is paying those employees. The term sheet does.

The company asks the court to hear the motion on 13 days' notice, which would put the hearing around October 26, 2026. According to the motion, the shorter notice period is needed because of "the Debtor's limited liquidity and substantial monthly cash burn," the need to start Houlihan Lokey's marketing "now that the exclusive period with Disney has concluded," and the milestones in Disney's agreement. A declaration from Adam Dunayer of Houlihan, filed alongside the motion as Document 17, supports the sale timeline.

$180 million for the people, $20 million for the company

Section 5 of the term sheet sets out the employee side of the deal in unusual detail. Within ten days of the September 18 agreement, Disney would require "not more than six (6) employees of the Company," one of them the chief executive officer, to accept offers. These are the Key Employees. Disney would offer employment to "at least sixty (60) other Company employees," at salary, bonus and Disney stock-based compensation levels set by Disney's own pay practices.

Then come the numbers. "Based on a preliminary review of approximately 65 Offered Employees, Disney estimates the annual run rate total compensation of the Offered Employees to be approximately US$60 million," the term sheet states. On top of that, Disney "will also provide an aggregate retention pool in an amount equal to US$30 million," paid in portions on the first and second anniversaries of the hiring and conditional on the employees staying. "The estimated total compensation and retention over years 1-3 is estimated to be approximately US$ 180 million."

Divided across 65 people, the $60 million run rate works out to roughly $923,000 per employee per year. That is PPC Land's calculation from the term sheet's own figures, not a number stated in the filing, and it is an average that will mask a wide spread between the chief executive and junior staff.

The term sheet is explicit that none of this money passes through Character.ai. "Employee compensation, retention payments and equity incentives will be payable directly to employees and will not constitute consideration payable to the Company," it says. The estate's creditors, in other words, have a claim on the $20 million, not on the $180 million.

The arrangement follows the pattern known as an acqui-hire: a buyer takes the team and licenses the technology rather than acquiring the company. Character.ai has been on the other side of a version of this before. In August 2024, Google struck a $2.7 billion licensing deal with Character.ai that brought the company's founders to Google. Two years later, a second large company is hiring most of the remaining workforce, this time with the company in Chapter 11.

What the company gave up to make it happen

The term sheet lists the concessions Character.ai made on the employee side. The company "will waive any applicable notice periods and will not enforce against any Offered Employee any non-competition, non-solicitation, confidentiality or invention assignment covenant that would restrict such employee from being employed by, or providing services to, Disney." It remains responsible for pay, benefits, accrued paid time off and severance through each employee's last day.

It also agreed to "release all employees, including its chief executive officer, that accept offers of employment with Disney from claims and causes of action including, as applicable, fiduciary duty claims." For the next three years, Character.ai may not try to recruit back any of those employees.

The Stalking Horse Transaction Agreement goes one step further. At closing, Disney would buy any claims Character.ai still holds against its former employees who joined Disney, the so-called Purchased Employee Claims. The motion's own assessment of that asset is blunt: "The Debtor does not believe there is any value to such claims."

The chief executive's move raised a legal question the motion addresses in a footnote. Disney hired "the Debtor's chief executive officer who was an 'insider' of the Debtor within the meaning of section 101(31) of the Bankruptcy Code." The company argues that this should not change the deferential business judgment standard the court applies, because no directors or controlling shareholders are shared between the two companies, the deal was led by committees "comprised solely of independents," and "none of the Debtor's former insiders has had meaningful input in substantial matters related to this chapter 11 case." The October 12 coverage identified Karandeep Anand, Character.ai's former CEO, as Disney's new chief technology officer. The filing does not name him.

How the $20 million is paid

The cash arrives in three pieces. According to the Exclusivity and Prepayment Agreement, Disney paid $5.5 million on September 18, an "Up-Front Payment" that "shall be non-refundable in all circumstances." It paid a further $2 million the same day as a deposit, refundable if Disney does not win the auction or the deal does not close by December 17, 2026. The remaining $12.5 million is due at closing.

The motion describes the first two payments together as "$7,500,000 of the $20,000,000 cash consideration up-front," or 37.5% of the total. The distinction matters for a rival bidder. If another party wins, Disney gets its $2 million deposit back plus up to $700,000 in bid protections, but the $5.5 million stays with Character.ai.

What Disney gets: a list of systems and nine patents

Schedule A of the Stalking Horse Transaction Agreement lists the Licensed Technology as "code repositories, documentations, frameworks, tools, and any other artifacts" in 25 named areas, plus a catch-all. They read as an inventory of how a consumer chatbot at scale is built and kept within limits:

  • the post-training stack, training recipes, reward model, benchmarks and evaluation framework;
  • a model safety stack, a fallback classifier stack, reinforcement learning adapters for safety, and "closed source vLLM to serve with classifier heads";
  • the inference stack for GPU cluster management, model routing and deployment, plus training and AI infrastructure and site reliability workflows;
  • the "Lorebook and prompt management stack" for managing character contexts, and a prompt optimization framework;
  • "Guardian (long horizon safety monitoring)," used "to monitor safety and context over extended conversational interactions";
  • "Age assurance (age prediction model)," described as "the underlying architecture, training code, and frameworks for the age prediction systems";
  • the multi-modal stack for image and video generation, the chat stack and "chat styles framework";
  • trust and safety moderation tools, red-teaming and adversarial testing frameworks, safety measurement tools, security infrastructure, and data science and agentic pipelines.

The catch-all covers "any other training infrastructure, training pipelines, know-how, evaluation frameworks, safety tools, documentation, design-specifications and technical materials reasonably necessary to utilize the foregoing and develop future models."

The presence of an age assurance model and a long-horizon safety monitor on the list is notable for a company whose legal troubles stem largely from interactions with minors. Disney would take a copy of those systems; Character.ai would keep the original.

The Licensed Patents table lists nine entries, all owned by Character Technologies. Four are issued US patents: an "Audio turn understanding system" (12,322,384, issued June 3, 2025), "Character turn summaries" (12,481,835, issued November 25, 2025), "Retraining a large language model" (12,664,375, issued June 23, 2026) and "Optimizing key value cache for large language model inference" (12,682,211, issued July 14, 2026). Three further applications are pending, and two, including one titled "Utilizing meta agents to modify the behavior of large language model-based agents," are marked "Not yet published."

The key value cache patents concern the cost of inference, the computing work a model does each time it answers. For a free chat app with heavy usage, that cost is a large part of operating expenses.

The terms of the license

The grant is "perpetual, worldwide, non-exclusive, transferable," sublicensable "through multiple tiers," "non-terminable, irrevocable, fully paid-up, royalty-free." It covers products and services offered "under branding owned or controlled by Licensee." Disney may sublicense only to its own consumer end users, its service providers and distributors, its affiliates, and the buyer of any Disney business that uses the technology. It may not license the technology on to unrelated third parties on a standalone basis.

Delivery is practical: Character.ai would give Disney access "to the relevant GitHub and Google Drive repositories" for 30 days. Disney would own anything it builds from the code, including "any models, weights and synthetic data," and Character.ai and any future owner of its IP promise not to challenge Disney's right to exploit those outputs. The license is drafted to survive a later bankruptcy, a change of control, or an exclusive license to someone else, with Disney protected under section 365(n) of the Bankruptcy Code, the provision that lets a licensee keep using IP after the licensor rejects the contract.

The technology is delivered "AS-IS," with Character.ai disclaiming any warranty that Disney's use "WILL BE ERROR-FREE, SECURE, OR UNINTERRUPTED."

What Disney does not get

Section 3.2 of the agreement, headed Excluded IP, is the passage that determines what remains for other bidders. According to the agreement, the license does not include:

  • technology Character.ai licenses from third parties;
  • trade names, logos, trademarks "or any other brand elements";
  • domain names, URLs, "social media accounts or handles and any website content";
  • "any consumer-facing applications of Licensor";
  • "Licensor's end user data or databases, any personally identifiable information of Licensor end users, any input entered by Licensor end users when engaging with Licensor's products and services, or any outputs generated for end users by Licensor's products and services";
  • "Unprocessed Data," defined as publicly sourced data not yet cleaned, de-identified or onboarded into training databases;
  • "training data or any Finished Models, including each user-selectable conversational model or chat style."

The term sheet says the same in shorter form: Disney "will not acquire or operate the Company's consumer-facing platform, products, services, customer accounts, contracts, trademarks, trade names, websites, domains or ongoing business operations." It adds that the deal "is not intended to and shall not constitute a transfer of the Company's business as a going concern."

So the code that trains and moderates models goes to Disney, while the models themselves, the data they were trained on, and every message users typed stay behind. That split separates the two things a bankruptcy buyer of a consumer AI company might want: the engineering, which can be copied, and the audience and its data, which cannot. Character.ai told the court in an earlier motion that it has had about 163 million current and past users.

The arrangement also keeps Disney away from the most legally sensitive asset in the estate. Section 363(b)(1) of the Bankruptcy Code restricts the sale of personally identifiable information where it conflicts with the debtor's privacy policy, and can require a consumer privacy ombudsman to be appointed. Today's motion does not mention an ombudsman, which is consistent with a stalking horse deal that excludes user data. Whether a later bidder for the user base would trigger that process is not addressed in the filing. A similar carve-out shaped the bankruptcy sale of Spirit Airlines' assets earlier this year, when Google won Spirit's data at auction for $10 million, with customer profiles carved out of the sale.

Because the license is non-exclusive, Character.ai keeps ownership of the licensed technology and "may continue to use, develop, license and otherwise exploit or monetize" it. The term sheet confirms that the company "may non-exclusively license, sell or otherwise provide the licensed intellectual property subject to the IP License to any third party." A buyer for the app could therefore acquire the same code Disney is licensing, subject to Disney's permanent rights.

Disney's employees keep the app running, including monetization

The amended transition services agreement, dated today, explains how a company with 18 remaining employees continues to operate. Disney supplies the people it hired. Schedule A of that agreement describes the service as "personnel needed (a) to support engineering, app and website maintenance, trust and safety, and monetization functions of CAI to support the ongoing operation of the Character.AI App, Website and Platform Services," along with "the orderly wind down or transition" of the app and support for bidders' due diligence.

Monetization appears on that list next to trust and safety. Character.ai earns revenue from subscriptions and, as the first-day filings showed, from advertising partners paying into an operating account. The people who maintain those functions are now Disney employees working on loan.

Disney charges nothing for their time. According to the agreement, "the Services Provider will not charge a fee," and Character.ai reimburses only documented third-party costs. The term sheet caps each individual's time on transition work at 20% of their weekly obligations. The services end no later than five months after September 18, 2026, which is February 18, 2027. The motion calls the agreement "below-market," and asks the court to approve Disney's assumption of it if Disney wins.

Schedule B of the agreement excludes twelve categories of corporate services from what Disney provides, among them legal advice, human resources, treasury, "public policy," "government relations," "communications and marketing" and "senior management." Disney's loaned staff can keep the platform working; they cannot run the company.

A data processing addendum, also new in the amended version, governs how those staff touch user data. Disney acts as a processor on Character.ai's instructions, and its personnel access personal data "directly through Service Recipient Systems using Service Recipient-managed laptops or devices." Disney "will not be required to receive, host, copy, retain, or maintain Personal Data outside of Service Recipient Systems." Security incidents must be reported to Character.ai within 48 hours. Character.ai remains "solely responsible for determining the purposes and means of Processing."

The motion also asks the court to exculpate Disney and its people from liability arising from "the provision, management, or oversight of the transition services," except for willful misconduct, bad faith or gross negligence.

What a rival bidder would face

The bidding procedures set the calendar that a competing buyer would need to meet. The full timetable and the marketing history are the subject of the Dunayer declaration; the points that bear on the Disney deal are these.

Any bid for the assets Disney is licensing must exceed Disney's $20 million by the break-up fee, set at $700,000, plus $1 million. That puts the opening floor at $21.7 million. Bids must be in cash, come with a 10% deposit, and contain no financing or diligence conditions. A rival must commit to close "by no later than November 30, 2026," more than two weeks earlier than Disney's own outside date of December 17. Bids are due November 20 at 5:00 p.m. Eastern; an auction, if needed, is set for November 23, with increments of $500,000, and the sale hearing for November 24.

Disney collects the bid protections "regardless of whether or not Disney makes any matching or competing bids at the Auction." The agreement also lets Disney terminate if the court has not entered the bidding procedures order within 21 days of the petition, which is November 2, 2026, or has not entered the sale order by November 30.

The procedures contain one provision aimed at the employee problem. If Disney loses, it must let one winning bidder "interview and make employment offers" to the former Character.ai staff it hired and "work in good faith" to move those who accept. Disney may wall off up to 20% of them. It would also provide the winner with transition services for no more than the lesser of 60 days after closing or 75 days after the auction. Before bids are due, Disney and Character.ai are to identify five Key Employees who will be available for diligence sessions with qualified bidders.

A rival, in other words, could try to buy the app and hire back most of the people who ran it, but those people are currently receiving Disney salaries and are eligible for a Disney retention pool that pays out only if they stay.

The regulatory clause

Section 10 of the term sheet addresses regulators. "The parties do not expect the Proposed Transaction to require any antitrust or other regulatory clearance or the expiration of any waiting period," it states, adding that the parties would check for non-US filing obligations "that may be triggered by the license of intellectual property or the hiring of personnel."

The next sentence limits what Character.ai can do on its own. "The Company will not participate in any meeting with any governmental authority regarding the Proposed Transaction without Disney's prior consent, expect as required by applicable law." The typo, "expect" for "except," is in the original.

Structures that combine a license with large-scale hiring have drawn attention from competition authorities. When Meta invested in Scale AI and hired its chief executive in 2025, analysts quoted by PPC Land argued that the arrangement broke a large acquisition into smaller parts to avoid FTC merger review. Character Technologies has its own history with the agency: in September 2025, the FTC sent 6(b) orders to seven companion chatbot operators, including Character Technologies, asking how they monetize engagement. The motion lists the FTC, the Antitrust Division of the Department of Justice and the attorney general of every state where the company operated among the parties to be served with the sale notice.

Discrepancies in the filing

Several details in the 295 pages do not match one another.

  • The motion's table of key terms says the transition services agreement was "amended and restated on October [●], 2026," with the date left blank. The agreement attached to the same motion is dated October 13, 2026.
  • Houlihan Lokey's contact appears as "Daniel Cullins" in the due diligence section and as "David Cullins" in the list of objection notice parties, with the same email address.
  • John Chatowski is described as "General Counsel" in the notice clause of the stalking horse agreement and the transition services schedule, and as "Associate General Counsel" in the schedule of service managers.
  • The term sheet set "the aim of consummating the closing by November 16, 2026," a target that the bidding calendar, with a November 24 sale hearing, has already passed.
  • The term sheet's outside date clause refers to "the later of December 17, 2026," naming only one date.
  • The term sheet requires up to six Key Employees to accept Disney offers, while the transition services agreement refers to five Key Employees for bidder diligence. The two provisions serve different purposes, but the filing does not say whether the five are drawn from the six.
  • The stalking horse agreement filed as an exhibit shows a blank Character.ai signature block on one page and a separately scanned signature page, dated October 13, 2026, on the next.

None of these changes the economics. They do show a document set assembled quickly, which is consistent with a debtor that says its cash runway is short.

Why this matters for the marketing industry

For advertisers and ad tech companies, the documents filed today clarify what is actually for sale. Disney is buying engineering capacity and a copy of the code that trained, moderated and served Character.ai's models. It is not buying the audience. The app, the user accounts, the brand and the contracts, including the advertising relationships that generate revenue, remain with the estate.

That matters for anyone buying Character.ai's inventory. Through at least February 18, 2027, or until the business is sold or wound down, Disney employees support the platform's "monetization functions" without charge. After that, the inventory exists only if a buyer wants to operate a companion chatbot with the litigation history this one carries. According to the motion, 28 parties approached by a previous banker were told the product was impressive but "the litigation and regulatory overhang on Character was too great."

The safety technology on Disney's list is also relevant to brand suitability. An age prediction model and a long-horizon safety monitor are the kinds of controls that buyers have struggled to verify across AI apps; a Deepsee study of 4,346 AI companion apps found buyers lose age ratings on 60% of them. Under the license, those systems can now be used in Disney-branded products, while also remaining with Character.ai.

Disney itself sells advertising at scale, and its streaming advertising revenue grew in its fiscal first quarter of 2026. The license allows Disney to build the licensed technology into any product under its own branding, which could include ad-supported services. The filing does not say what Disney plans to build.

The price gap is the other signal. A company that signed a $2.7 billion licensing deal with Google two years ago is set to receive $20 million, while its staff are priced at about $180 million over three years by the company hiring them. For marketers assessing AI vendors, the filing is a reminder that the value of such companies can sit with the people and code, which can leave, rather than with the user base, which cannot easily be transferred.

What comes next

The court must first decide whether to hear the motion on shortened notice. If the bidding procedures are approved, objections to the sale are due November 13 at 4:00 p.m. Eastern, contract objections November 18, bids November 20, the auction November 23 and the sale hearing November 24. If no qualifying rival bid arrives, Character.ai will ask the court to approve Disney's deal without an auction. The motion is direct about the alternative: "If such offers are unavailable, or if the transaction with Disney is not approved, Character's platform will be wound down." Disney's deal, as filed, does not provide for the app to continue.

Timeline

  • August 2024: Google strikes a $2.7 billion licensing deal with Character.ai
  • June 2025: Meta's $14.8 billion Scale AI investment and hiring of its CEO draws antitrust questions
  • June 3, 2025: US patent 12,322,384 ("Audio turn understanding system") issued to Character Technologies
  • August 2025: Character.ai hires its prior banker, which approaches about 28 parties
  • September 10, 2025: FTC issues 6(b) orders to seven companion chatbot companies, including Character Technologies
  • November 25, 2025: US patent 12,481,835 ("Character turn summaries") issued
  • June 23, 2026: US patent 12,664,375 ("Retraining a large language model") issued
  • July 14, 2026: US patent 12,682,211 ("Optimizing key value cache for large language model inference") issued
  • August 2026: Prior banker's engagement ends
  • August 14, 2026: Google wins Spirit Airlines' bankruptcy data auction at $10 million
  • August 19, 2026: Disney and Character.ai sign a mutual non-disclosure agreement
  • September 18, 2026: Exclusivity and Prepayment Agreement, term sheet and original transition services agreement signed; Disney pays $5.5 million non-refundable and a $2 million deposit
  • October 12, 2026: Character Technologies files for Chapter 11 in Delaware, case 26-11603
  • October 13, 2026: Bidding procedures motion (Doc 15) filed with the stalking horse agreement, amended transition services agreement and term sheet
  • Around October 26, 2026: Proposed hearing on the motion, on 13 days' notice
  • November 2, 2026: Disney may terminate if the bidding procedures order has not been entered
  • November 4, 2026: Deadline to serve assumption and assignment notices
  • November 9, 2026: Deadline to designate additional stalking horse bidders
  • November 13, 2026: Sale objection deadline
  • November 16, 2026: Original target closing date in the term sheet
  • November 18, 2026: Contract objection deadline
  • November 20, 2026: Bid deadline, 5:00 p.m. Eastern
  • November 23, 2026: Auction, if needed
  • November 24, 2026: Proposed sale hearing
  • November 30, 2026: Closing deadline for a rival winning bidder; Disney's deadline for entry of the sale order
  • December 17, 2026: Outside date for closing the Disney deal
  • February 18, 2027: Latest end date for Disney's transition services

Summary

Who: Character Technologies Inc., the company behind Character.ai, as debtor; Disney Worldwide Services, Inc. as stalking horse licensee; about 65 former Character.ai employees hired by Disney; Houlihan Lokey as proposed investment banker; and any rival bidders.

What: A bidding procedures motion and its exhibits disclosing that Disney estimates about $180 million in compensation and retention over three years for the employees it hired, against $20 million paid to Character.ai for a non-exclusive license to its training, safety and serving code and nine patents. The license excludes the app, brand, domains, user data, user inputs and outputs, training data and finished models, which remain available to other bidders.

When: Filed today, October 13, 2026, one day after the Chapter 11 petition. Bids are due November 20, an auction is set for November 23 and the sale hearing for November 24, with Disney's outside date on December 17, 2026.

Where: US Bankruptcy Court for the District of Delaware, case 26-11603 (BLS).

Why: Character.ai says litigation, regulatory exposure and high costs left it unable to fund operations, and that staff attrition threatened its ability to run the platform safely. Disney's structure stabilized the workforce by hiring it, while the estate kept the user-facing business. For the advertising market, the filing shows that the audience and its data are separate from the technology Disney is licensing, and that the app's inventory survives only if another buyer chooses to operate it.