Write every AI contract as if your vendor files for Chapter 11 next year

Character.ai spent $10 million a month on compute in 2025. In its best month ever, revenue from every source, ads included, came to $5.3 million. Subscriptions, the part customers chose to pay for, peaked at $2.8 million and at times fell below $1 million. Those figures come from the affidavit its chief executive, Colin Adams, filed when the company entered Chapter 11 on 13 October. I think anyone signing an AI software contract this quarter should read them first.

I expected the filing to blame the lawsuits. The legal bill was real. In early 2026 Character.ai and Google settled several suits brought by families who claimed their teenage children died by suicide or harmed themselves after using the app, and several states have sued as well. But Adams says the business was unsustainable even without the litigation. In his words, the company's technology "is expensive to operate". By August 2026 it was still losing roughly $8-9 million a month, which the filing presents as a big improvement.

Look at what that improvement involved. Character.ai moved inference to cheaper GPU capacity. It stopped building its own foundation models and post-trained open-weight ones instead. It cut staff, launched in-app ads in mid-2025 and added in-app purchases in early 2026. It spent $19.7 million on salaries and benefits in the first eight months of 2026, and the filing says employees quit because they doubted the company would survive. The management did what any cost-cutting board would ask, and the company still burned $56.1 million on compute between January and August.

This company was valued at $1 billion in 2023 after a $150 million round led by a16z. It had a household brand and a licensing relationship with Google. Its assets now sit somewhere between $50 million and $100 million, with liabilities in the same range. The service stays up only if a buyer appears before the sale completes in late November or early December, and the company has warned it could shut down if none does.

Now replace the consumer chatbot with the AI tool running your support queue, your sales ops or your contract review. Plenty of the B2B AI products sold to companies like yours rent the same GPUs and pay for the same tokens, at per-seat prices set before anyone knew what heavy users would cost. OpenAI and Anthropic keep raising fresh money. Google and Meta pay for their models out of advertising. The vendor in your procurement queue has neither cushion, and when its runway ends you will learn about it from a press release, the way Character.ai's users did.

The obvious reply is that inference keeps getting cheaper and enterprise buyers pay far more per user than teenagers chatting with fictional characters. Character.ai's own numbers show the limit of the first argument. It did cut its compute bill from $13.8 million a month in 2024 to $10 million in 2025, and lower again this year. It got there by swapping in cheaper models and serving a worse product, and the smaller bill still outran revenue. A falling cost curve does you no good if your vendor runs out of cash before the curve arrives. Higher enterprise prices help only if the vendor's margin after compute is positive, and most vendors will not tell you whether it is.

The Disney deal gets cited as proof the assets kept their value. Disney agreed to pay $20 million for a non-exclusive, perpetual licence to Character.ai's intellectual property, weeks after hiring its former chief executive to lead its tech efforts. Look at who benefits. Disney gets the technology on its own terms and for ever. The people who used the product get a blog post saying the platform is running for now. In a court-supervised sale, creditors and bidders do the negotiating while customers wait to learn who will own the service they depend on.

So price the risk as you would with any supplier that loses money on every unit it sells. Insist on a full export of your data, prompts, configurations and any fine-tuned weights built on your data, in a format another vendor can load, delivered every month without anyone having to ask. Put those fine-tuned artefacts into escrow, released automatically on an insolvency filing. Get a termination right that triggers on change of control, so an asset buyer cannot inherit your account and reprice it. Ask for the vendor's gross margin after inference and its months of cash on hand. If the vendor refuses to give either number, I would not sign for longer than a month at a time.

Before Character.ai's sale closes in late November or early December, pull every AI contract your company signed this year and find the clause that says what happens to your data in a bankruptcy sale. Where there is none, switch the next invoice to monthly billing and refuse to renew until the export and escrow terms are in writing.

Prompted by Character.ai's Bankruptcy Documents Show the Economics of AI Don't Work, 404 Media.