Director John Lasseter's first experience with computer animation was during his work as an animator at Walt Disney Feature Animation, when two of his friends showed him the light-cycle scene from Tron. It was an eye-opening experience which awakened Lasseter to the possibilities offered by the new medium of computer-generated animation. Lasseter tried to pitch The Brave Little Toaster as a fully computer-animated film to Disney, but the idea was rejected and Lasseter was fired. He then went on to work at Lucasfilm and in 1986, he became a founding member of Pixar. In 1986, Pixar was purchased by entrepreneur and Apple Inc. co-founder Steve Jobs. At Pixar, Lasseter created short, computer-animated films to show off the Pixar Image Computer's capabilities. In 1988 Lasseter produced the short film Tin Toy told from the perspective of a toy and referencing Lasseter's love of classic toys. Tin Toy won the 1988 Academy Award for Best Animated Short Film, the first computer-generated film to do so.
Tin Toy gained Disney's attention, and the new team at The Walt Disney Company—CEO Michael Eisner and chairman Jeffrey Katzenberg in the film division—began a quest to get Lasseter to come back. Lasseter, grateful for Jobs' faith in him, felt compelled to stay with Pixar, telling co-founder Ed Catmull, "I can go to Disney and be a director, or I can stay here and make history." Katzenberg realized he could not lure Lasseter back to Disney and therefore set plans into motion to ink a production deal with Pixar to produce a film. Disney had always made all their movies in-house and refused to change this. But when Tim Burton, who used to work at Disney, wanted to buy back the rights to The Nightmare Before Christmas, Disney struck a deal allowing him to make it as a Disney movie outside the studio. This opened the door for Pixar to make their movies outside Disney.
Both sides were willing. Catmull and fellow Pixar co-founder Alvy Ray Smith had long wanted to produce a computer-animated feature, but only by the early 1990s were the computers cheap and powerful enough to make this possible. In addition, Disney had licensed Pixar's Computer Animation Production System (CAPS), and that made it the largest customer for Pixar's computers. Jobs made it apparent to Katzenberg that although Disney was happy with Pixar, it was not the other way around: "We want to do a film with you," said Jobs. "That would make us happy." At this same time, Peter Schneider, president of Walt Disney Feature Animation, was potentially interested in making a feature film with Pixar. When Catmull, Smith and head of animation Ralph Guggenheim met with Schneider in the summer of 1990, they found the atmosphere to be puzzling and contentious. They later learned that Katzenberg intended that if Disney were to make a film with Pixar, it would be outside Schneider's purview, which aggravated Schneider. After that first meeting, the Pixar contingent went home with low expectations and was surprised when Katzenberg called for another conference. Catmull, Smith, and Guggenheim were joined by Bill Reeves (head of animation research and development), Jobs, and Lasseter. They brought with them an idea for a half-hour television special called A Tin Toy Christmas. They reasoned that a television program would be a sensible way to gain experience before tackling a feature film.
They met with Katzenberg at a conference table in the Team Disney building at the Walt Disney Studios in Burbank. Catmull and Smith considered it would be difficult to keep Katzenberg interested in working with the company over time. They considered it even more difficult to sell Lasseter and the junior animators on the idea of working with Disney, who had a bad reputation for how they treated their animators, and Katzenberg, who had built a reputation as a micromanaging tyrant. Katzenberg asserted this himself in the meeting: "Everybody thinks I'm a tyrant. I am a tyrant. But I'm usually right." He threw out the idea of a half-hour special and eyed Lasseter as the key talent in the room: "John, since you won't come work for me, I'm going to make it work this way." He invited the six visitors to mingle with the animators—"ask them anything at all"—and the men did so, finding they all backed up Katzenberg's statements. Lasseter felt he would be able to work with Disney and the two companies began negotiations. Pixar at this time was on the verge of bankruptcy and needed a deal with Disney. Katzenberg insisted that Disney be given the rights to Pixar's proprietary technology for making 3-D animation, but Jobs refused. In another case, Jobs demanded Pixar would have part ownership of the film and its characters, sharing control of both video rights and sequels, but Katzenberg refused. Disney and Pixar reached accord on contract terms in an agreement dated May 3, 1991, and signed on in early July. Eventually, the deal specified that Disney would own the picture and its characters outright, have creative control, and pay Pixar about 12.5% of the ticket revenues. It had the option (but not the obligation) to do Pixar's next two films and the right to make (with or without Pixar) sequels using the characters in the film. Disney could also kill the film at any time with only a small penalty. These early negotiations became a point of contention between Jobs and Eisner for many years.
An agreement to produce a feature film based on Tin Toy with a working title of Toy Story was finalized and production began soon thereafter.
Jobs funded the project personally. Jobs did not insert himself into the creative process, but instead managed the relationship with Disney.