Disney expects to spend about $180 million on Character.AI recruits, $20 million on the startup

Disney expects to spend about $180 million over three years paying and keeping the 66 people it hired from Character.AI, the chatbot startup that filed for Chapter 11 on October 12. The bankrupt company stands to receive $20 million. Both figures come from Delaware bankruptcy court filings reported by Business Insider and PPC Land.

The larger number has two parts. Disney estimates the annual run-rate compensation of the offered employees at about $60 million, "based on a preliminary review of approximately 65 Offered Employees," according to a term sheet attached to Character.AI's bidding procedures motion and quoted by PPC Land. On top of that sits a $30 million retention pool, paid out on the first and second anniversaries of hiring and only to those who stay. "Employee compensation, retention payments and equity incentives will be payable directly to employees and will not constitute consideration payable to the Company," the term sheet says. Creditors have a claim on the $20 million, not on the $180 million.

Character.AI had 86 employees before 66 of them went to Disney, PPC Land reported. Of those offered jobs, 56 had already resigned from the startup, and the other 10 were waiting for the U.S. government to update their work visas, according to Business Insider. The group follows Karandeep Anand, Character.AI's former chief executive, whom Disney named its first chief technology officer on September 18.

The hiring came two weeks after Disney laid off several hundred workers, including some tech employees, in its third major round of cuts since Josh D'Amaro became chief executive in mid-March, according to Business Insider. Corey Martin, an entertainment lawyer at Granderson Des Rochers who did not work on the deal, told the outlet the pay levels did not surprise him because the employees are Character.AI's biggest asset. "They're highly compensated employees. The numbers can be eye-popping, but it's not that unusual in this space," he said.

The startup cleared the path. Under the term sheet, Character.AI agreed to waive notice periods and not to enforce non-compete, non-solicitation, confidentiality or invention assignment covenants that would keep any offered employee from working for Disney. It released those who accepted, including its chief executive, from claims that include breach of fiduciary duty, and it may not try to recruit any of them back for three years. At closing, Disney would also buy whatever claims Character.AI still holds against those former employees. The motion's assessment: "The Debtor does not believe there is any value to such claims."

The deal is a stalking horse bid, so a rival can still top it. Bids are due November 20, with an auction set for November 23 and a sale hearing the next day. If Disney loses, the winning bidder may interview and make offers to the former Character.AI staff Disney hired, though Disney may wall off up to 20% of them. Any rival offer would land against Disney salaries and a retention pool that pays only if workers stay. WIRED reported that experts raised concerns that bouncing employees between companies within months is unrealistic and that the arrangement cannot be easily unwound.

Former Character.AI employees are also still supporting Character.AI’s platform during the sale process, even though Disney’s bid is for a non-exclusive IP license and certain claims rather than the app or platform itself. Character.AI's own announcement says Disney will provide "transition services using former Company employees it has hired" so the platform can keep operating during the sale. The transition agreement, as PPC Land describes it, covers engineering, app and website maintenance, trust and safety and monetization; Disney charges no fee, each person's time on the work is capped at 20% of their weekly obligations, and the arrangement ends no later than February 18, 2027. Human resources, legal and senior management are excluded.

The bankruptcy structure is also designed to keep liabilities with Character.AI. A motion filed by Character.AI's counsel says Disney required the deal be "fully consummated" through bankruptcy because of the startup's "diminishing cash reserve and significant litigation and regulatory risks," WIRED reported. A draft order Disney prepared states the transaction is not a merger and leaves Character.AI responsible for its own liabilities. The term sheet says the parties do not expect to need antitrust or other regulatory clearance, and bars Character.AI from meeting any government authority about the deal without Disney's consent, except as required by law.

Those authorities are already in the case. A multistate investigation into Character.AI had grown to 46 states and territories by the time of the filing, according to WIRED, and the states that filed a notice of interest in the bankruptcy have said they reserve the right to challenge any plan.