What Is a Stalking Horse Bid and How Does a Bankruptcy Sale Work?

A stalking horse bid is the first, pre-negotiated offer for a company's assets in a bankruptcy sale. It sets the minimum price. Other buyers can then bid higher at an auction, and if none do, the stalking horse wins.

The short version

When a company sells assets in Chapter 11, the court wants the best price available, not just the first one. The company finds one serious buyer, signs a deal with them before the filing, and announces it as the floor. That buyer is the stalking horse. Everyone else is invited to beat it.

A recent example. Character.AI filed for Chapter 11 on October 12, 2026 and named a Disney subsidiary as the stalking horse for $20 million, covering a non-exclusive perpetual license of certain company IP and certain company claims. The company said the sale process was expected to finish in late November or early December and that other bidders could still come in. If no one did, the company said the platform would be wound down.

How a stalking horse sale works

1. The company signs a deal first. It agrees terms with one buyer before or at the time of filing. 2. The court approves bidding procedures. These set the deadline, the minimum overbid and what counts as a qualified bidder. 3. The stalking horse gets protections. Typically a break-up fee or expense reimbursement if someone else wins, and sometimes a right to match a higher bid. These are negotiated and approved by the court, and they come out of the sale proceeds. 4. Other buyers do diligence and bid. If no qualified bid arrives, the stalking horse deal closes. If one does, the company runs an auction. 5. The court approves the winner. Many of these sales happen under Section 363 of the Bankruptcy Code, which lets a buyer take assets free of most existing claims and liens.

Why it matters to founders

The floor becomes the story. A $20 million stalking horse tells every other buyer what the assets are worth to someone who has already done the work. Beating it takes real money and real diligence, so many processes end at or near the floor.

Buyers pay for assets and people, not for the company. In a 363 sale the buyer chooses what to take. Contracts, employees and liabilities they do not want stay with the estate.

Creditors get paid before equity. In a bankruptcy sale, secured creditors are paid first, then unsecured creditors, then preferred and common stockholders. If the price does not clear the debt, equity holders usually receive nothing. See how liquidation preferences work in a sale.

The timeline is short. Weeks to a few months, not the six to nine months of a normal sale process. You cannot build a competitive process from nothing after the filing.

What to do before you get there

Run the sale process while you still have cash. A company with three months of runway can still talk to six buyers. A company in Chapter 11 has one bidder and a court calendar. Read what a distressed process looks like for a founder in the low-runway case.

Know who your natural buyers are before you need them. The stalking horse is usually someone with an existing relationship. Build the list early.

Ask what a license-and-hire deal leaves behind. If a buyer offers a license plus offers to your team, find out who is paid, what stays in the company, and who covers the cost of winding it down. See what happens to equity in a reverse acqui-hire.

Talk to a restructuring lawyer early. Before you file, not after.

This is general information, not legal advice. Bankruptcy law varies by case and by court. Talk to a restructuring lawyer about your situation.

Related questions

What happens to my equity if my startup is acquired in a down round? What are my options if I cannot raise my next VC round? What is the difference between an acqui-hire and a strategic exit?