The News
Character Technologies, the company behind Character.AI, filed for Chapter 11 in Delaware on October 12. Disney opened the bidding at $20 million for a nonexclusive license to some of its technology, as we reported. In 2024 Google reportedly paid $2.7 billion to license the same company's technology and hire its founders. NPR counts at least six deals built this way with AI startups in the past two years. This month Apple disclosed one with Huxe and Anthropic struck one with Opaque.
The View
Go through the Character.AI bankruptcy numbers and the 2024 deal looks different. Compute ran about $56 million from January through August. Monthly revenue peaked at $5.3 million. When it filed, the company was losing $8 million to $9 million a month.
So where did the $2.7 billion go? Mostly to the people who left, apparently, and to early investors who were bought out in the 2024 deal (that was the reporting at the time, and I have no reason to doubt it). The company kept the app, the 20 million users, the compute bill and the lawsuits.
I've been on the selling side of a few deals. In a normal acquisition the buyer takes the whole thing, warts included. The liabilities come with the company. That's the price of owning it, and every buyer's lawyer knows it.
The reverse acquihire splits the company in two. The buyer takes the people and a license to the technology. The shell keeps everything else. For the buyer that is the whole point (and it seems to be why these deals often avoid a full merger review, though the FTC asked questions about Microsoft and Inflection back in 2024, if I recall).
Paying $2.7 billion for a nonexclusive license is a perfectly normal licensing transaction. That's what we're doing here, right?
Disney's opening bid is about 0.7% of what Google paid. That's the market price of a company once its founders have gone.
The engineering logic is honestly pretty good. A license gets a big lab a working team in weeks, without the year a merger review can take, and the team gets to keep building the thing they were building. Few founders would turn down a check that size. The structure isn't the problem.
Who's left holding the company is. The employees who didn't get an offer. The customers who built on the product. The users. Anyone suing. With Character.AI the bill arrived two years later, and nobody who signed the 2024 deal is paying it.
It is spreading to smaller deals, too. Apple's filing on Huxe says it can make offers to "certain" employees and gets a nonexclusive license. Nvidia's $20 billion arrangement with Groq is now under a Justice Department review and a stockholder suit, as we covered. Somebody is going to write a rule about this. I'd rather the rule said who keeps the liabilities than banned the structure.
Room for Disagreement
The investors in Character.AI reportedly did fine in 2024, and some of the staff got jobs at Google. Without the deal the company might have failed sooner, with nothing for anyone. A license-and-hire can be the best exit available when the alternative is a slow wind-down.
Bottom Line
If you're a founder and the offer is a license plus jobs for "certain employees," get in writing who carries the company's liabilities after the team leaves. If you work at a startup that gets one of these offers, find out whether your name is on the list or on what's left.
— Hank