Structured Finance and Asset-based Financing Facilities

Adam Torres and Mehak Rashid discuss Asset-based Financing Facilities.

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Show Notes:

What should borrowers consider when reviewing and comparing term sheets? In this episode, Adam Torres and Mehak Rashid, Managing Partner at Legal Scale LLP. Explore Structured Finance and Asset-based Financing Facilities. Mehak will also be participating in the Venture Debt Conference hosted by DealFlow events.

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About Mehak Rashid

Mehak Rashid is a partner at Legal Scale and head of the debt finance practice. She primarily focuses on representation of private credit funds and corporate borrowers in a wide range of financing transactions, including asset-based, leveraged acquisition, working capital and factoring financings, and other secured and unsecured financings.

Mehak received her J.D. and M.B.A. from Cornell Law School and her B.A. in Political Science and Math from Rutgers University (New Brunswick). She is admitted to the bar in New York, New Jersey, D.C., Connecticut and Massachusetts.

Full Unedited Transcript

Hey, I’d like to welcome you to another episode of Mission Matters. My name is Adam Torres, and if you’d like to apply to be a guest in the show, just head on over to mission matters.com and click on Be Our Guest to Apply. All right, so today is a very special episode. It’s part of our Venture Debt Conference, 2025 coverage.

I brought on Mehak Rashid, who is managing partner over at Legal Scale, LLP Mehak. Welcome to the show. Thanks so much. I’m happy to be here. All right, Mehak. So we, we got a lot to talk about today, so of course we’re gonna get into the overall topic, structured finance and asset-based financing facilities.

So we’ll get into that, of course. I also wanna get into the Venture Deck conference and get into maybe the involvement of legal scale and the conference. Big shot. Speaking of the conference, big shout out to. Phil and all the deal flow team for, for making it happen. I’ve been to many of their conferences, been covering ’em for a long time.

They do an amazing job. So big shout out to Phil and the team. We we’re, we’re, we’re, we’re we’re on your side out here. But Maha, just to get us started, we’ll start with what we like to call our mission matters minute. So at Mission Matters, our aim and our goal is to amplify stories for entrepreneurs, executives and experts.

That’s what we do. Maek, what mission matters to you? I always wanted to make law more accessible to everybody in the field. The problem is, and I come from a big law background, the problem is that companies that need the sophisticated level of work. Can’t quite afford it because big law is inaccessible to a lot of folks, whether that’s the private credit funds that are starting their first fund, second fund, or folks that are getting their series A or series B on the company side.

Either way, it’s very difficult to pay the high prices of big law. But you also don’t want to get unsophisticated legal advice. Mm-hmm. And so that’s really what matters to me, is to provide that highly sophisticated, interesting and complicated work that we do, but also keeping in mind that these are companies that are starting up or.

Credit funds that have to give back to their investors. Mm-hmm. And we try to marry those two missions from both sides in order to make things, like I said, more accessible. Yeah, it’s great love bringing mission-based individuals on the line to share why they do what they do, how they’re doing it, and really what we can all learn from that.

So, great, great having you on. I wanna, I wanna go back in time a bit here Maha, and maybe get into how you got into the. Field and even in law, I mean, there’s a lot of different things that you could have done, a lot of different areas that you could have pursued. Like, like why this, like, like how’d that take place?

Yeah, so I, when I went to law school, unlike folks where, you know, you watch tv, you see suits, and you see all these dramas where people are in court and yelling at each other, that was never interesting to me. What I really liked doing is making deals. And that’s also why I also went to business school because I wanted to, again, combine the combin the legal with the business and make sure that I’m coming from both perspectives when I’m engaging in any transaction.

And that’s what really led me to the finance world, because especially in debt finance. Every document, I like to call them living documents. Yeah. Because it’s not like, let’s say m and a where as soon as you close a transaction, both parties kind of walk away. Mm-hmm. That’s the document that lives for years and it’s an ongoing relationship.

So I really like that because at the end of the day, you’re getting in bed with a lender or a borrower, and that relationship is going to be ongoing. So I like to not only make sure that that. Happens in a collegial manner, but then also be a zealous advocate for my own client and make sure that it, everything works for them.

So I always liked this aspect of it, and that’s why when I started my career, I went into finance. I also, you know, went into finance from the lender side where I worked at Morgan Stanley for a little bit. And that way I got both the legal perspective, the business perspective, and I was able to then advise my clients in a much more wholesome and rounded manner.

Yeah. So Mehak, when, when I, I wanna, I wanna spend a little bit of time here also on the on the Venture Debt Conference. So talk, maybe talk a little bit. I think you’re gonna be speaking there, right? Like talk maybe a little bit about the, about the topic and li little bit of spoilers for my audience.

Like, like what, what’s gonna be happening That’s right. Without giving too much away. Yeah, exactly. No legal scale is going to be a silver sponsor at the Venture Doc conference. This is the second year in a row that we are sponsoring. And I’m speaking there as well. So we are very excited. The topics that the conference covers range from a wide variety of.

Types of financings to, is this really right for you? Mm-hmm. And typically I’ll be speaking about the different types including typical venture debt, including MCA constructs. Mm-hmm. And a BL constructs and just comparing and contrasting. What might be best for a company or a lender in whatever position in order to maximize their returns, security and create the proper construct and structure for the type of financing they’re doing.

Now you now, this is my first year covering this particular conference. I’ve worked with deal flow and like their micro cap conference and a bunch of other things. So, but for the Venture debt conference, this is my first year I’m covering this one and I haven’t been to this one in person yet. I’m sure I’ll be out there at some point.

But that being said, what, what keeps legal scale and you, you know, continuing to come back to this particular conference, like what do you think makes it special? The team that puts it on is fantastic. You know, we already gave a shout out to Phil, but everyone that I’ve worked with is really responsive and on top of that, this conference has grown over the years.

So at this point, we’re now expecting a lot of attendees. However, unlike other conferences that have more than 10,000 attendees, where it almost becomes impossible to meet folks out of the blue, this one, what I really like about it is that I’m able to go up to anybody there and talk to them about their needs.

Why are they there? Learn more about them. Yeah. And then give the information about myself too. So it creates a lot of organic conversations, which I think is. A unique idea about conferences like this one. So I would highly encourage companies and lenders, especially ones based out of New York, since it’s local to New York.

Mm-hmm. Or I as well to come out and attend. Now the I, I want to go further into legal scale. So maybe talk a little bit about exactly who what, what types of companies get the best value out of working with Le Legal Scale, whether it’s size, the company, whether it’s employee count, like whatever, whatever that metric is that, that you feel that those are the, the, the avatar, if you will.

Right. So at Legal Scale, we really focus on financing transactions. Mm-hmm. And basically when is money exchanging hands? Now that could be debt finance, which is the practice that I had that could be equity and private equity financing, which is the practice that my partner heads. Or for example, fund formation where we help set up funds and then we also do m and a transactions.

Yeah, all four of those buckets are what, again, I would say and come back to being more sophisticated type of work than the general corporate work. So there are a lot of companies that. Just need a startup document to get them incorporated. And yeah, you know, they’re still on what we call the FFF Round, which is the friends, family and fools round.

And so at that point they’re still A-K-A-F-F. Come on. Exactly right. So they’re still figuring things out. Where we really come in and where we’re most useful to the folks that we work with is when they’re looking to graduate to the next level. Mm-hmm. And get that financing round under their belt, whether it’s a price series, a round, or it’s their first debt facility that they’re putting in place or on the lender side, whether it’s their 10th debt facility, but we’re still working with early stage borrowers on the other side.

Yeah. Those are our ideal clients that we work with. And the great part is for a lot of folks when it is their first time doing something mm-hmm. We can absolutely help and hold their hand throughout the entire process. Yeah. So one one client I had recently, they were using another law firm for a long time.

We eventually were able to work with them. This is a lender side asset manager, and we were able to do their first credit facility and the principal there calls me after it was done and goes, I didn’t know it could be that easy and I didn’t need to be as involved as I was previously was like, yeah.

What we do is make things easy for you. Mm-hmm. So that you can focus on your pipeline. And we can focus on the legal. Hmm. What do, why do you think that was, so that that particular experience, I’m sure there were a lot of things, but I kind of wanna build that out just a little bit more. Like why was that such a different experience maybe for this principal?

Yeah. It’s a great question. The reason I think it was easier was because what we like to do is create. Different functions that make it more digestible for folks when they’re reviewing. So if I get 150 page credit agreement, I know for a fact that my client’s eyes will glaze over before they get to page three.

Come on, come on, hold on, come on, come on. I’ll give them more credit. You’re right. At least page 10. Come on. Can we can make it to the double digits. Okay, go ahead. That’s right. And so what we like to do is make that into bite-sized pieces. And, you know, create issues lists for folks so that they can just respond.

We’ll give our recommendations so that if they’re not sure about something, they can rely on us. And we really like to be the people that can guide people that might not have familiarity with all the legalese that we have to go through. And that way they can rely on us and we can get things done way faster.

Yeah. So speaking of the agreements, I think that that’s a great transition. What should let, let, we’ll take this from two different sides maybe, but let’s start maybe with the borrower side. Mm-hmm. What should borrowers consider when reviewing and comparing term sheets? Like, let’s take it from that side first.

Yeah, absolutely. So. I found that whenever I work with borrowers, they tend to just be stuck on one number, which is the interest rate. Yeah. And they’ll always just look at, well, this term sheet, it is SOR plus five, and this term sheet is SOR plus 10. So I’m definitely going with the SFR plus five. Mm-hmm.

But then I always tell them, look in what we call the all in yield. Yeah. So it’s not only the interest rate, but. How many warrants are you giving up? What percentage of your company are you giving up? Because that’s part of the economics as well. Mm-hmm. People often overlook warrants or if there’s OID at closing and you’re paying an upfront fee or there’s any sort of penalty that might come with prepayments, for example.

That’s also things that you have to consider because, everybody wants to enter into a credit agreement. Yeah. But nobody thinks about the exit. So you also have to think about, okay, if I have this facility and my company just grows like anything. Mm-hmm. And I need to graduate from this, do I have handcuffs on and do I need to pay some sort of exorbitant fee in order to get outta this credit agreement and into something that makes more sense for my business?

Yeah. So all those things combined. Create a much different picture than just looking at SOR plus five plus, so r plus 10. Mm-hmm. Why? Why do you think borrowers sometimes neglect those other things and not looking at the total package? And I know that’s gonna be a case by case scenario, but you’ve been doing this a long time.

Like why, why do you think that is? I think partially because it’s future forward planning. So you have to think the credit facilities typically last anywhere. You know, an average is like two to five years. Mm-hmm. So thinking about your business that might be getting the first credit facility they’ve ever received.

Yeah. And thinking three years ahead from there, yeah. May seem like an eternity. And so people just say, don’t worry about it. Like, we’ll figure it out when we get to it. Mm-hmm. So this is one of those things where we should kind of figure it out beforehand, and that’s why I think. That’s often overlooked.

Mm. So sometimes that’s experience. Yeah. Right. And on the warrant side, for example mm-hmm. People sometimes don’t think about giving up their equity ’cause they might not realize how valuable their equity might become later on. Mm-hmm. Let’s let’s let, let’s put in a question from the lender side just to, just to kind of mix it up a bit.

So what protections provided to lenders in an asset backed facility that aren’t maybe typical in term loans? Like, let’s maybe take one from the lender side. Absolutely. The difference between an asset-backed facility and a typical term loan is actually what you’re financing. Mm-hmm. So for example, for a lot of venture debt facilities where the company might not have a lot of assets at that point, and its main asset is probably ip.

Mm-hmm. At that point, you’re really underwriting the founders and the potential IP value that might. Grow over time. Yeah. And so what you’re really doing is taking a bet on it and there may be more protections in place, but if things go south, it has to be more of a conversation and figuring out how to even liquidate.

Of that asset, especially if it’s ip. Yeah. On the asset backside, what I like about that is that there are hard assets that you are actually financing. Mm-hmm. So, for example, I did a an asset backed facility recently where we financed. Computer GPUs to, I, I thought this deal is very interesting. It was to mine Bitcoin and create ai and so they needed super computer GPUs.

Wow. This was a cross border transaction based on here in the US mm-hmm. And in Iceland. So my client got to fly out to Iceland. We were on the lender side. They did a whole onsite check and then of course checked at the hot springs as well. So, yes. I was gonna say, gotta go to the hot springs.

Exactly. So what I like about those types of facilities is if things go south, you can actually take possession of those assets and you can immediately liquidate. Mm-hmm. And we did this recently. Unfortunately one company went under and it was like a chair manufacturing company. And so we helped do an out of court restructuring and really workout process.

And and we ended up doing a sale of the assets. So I had my client sitting in his office with 250 computer chairs all in his office. So it was quite funny to, he sent a picture over to us of just him sitting there like, what am I gonna do with all these chairs? It does allow for quick liquidity and recovery on.

The loan that the lender lent out as opposed to trying to find value for IP and a buyer for it. Yeah, no, those are, those are great examples. And I’m just picturing these chairs like, yeah, you want a chair? We’re in the chair business now. Heck, exactly. Some of them are leaking oil as well, so.

What shifting focus here slightly. What kind of, just in general from, I mean, from your practice, what kind of trends are you following in venture, just in general? Like what, what kind of things are you seeing? I. Yeah, so I’m seeing that a lot of the very early stage companies, so serious seed or just safes at that point mm-hmm.

They’re getting a like a take it or leave it type of structure from the vendors. So it’s, you know, it does tie their hands up, but they’re options are limited and therefore when they enter into these facilities, they don’t really have the ability to negotiate. Hmm. But as soon as they get to a little bit later.

So let’s say they’ve raised their series C already, or they’re about to raise their Series A. They have a lot more room for negotiation and flexibility. So what I would always recommend is getting a small debt facility in place initially, where you can deploy that and have good exit options. Hmm. And you might not need to overnegotiate that for.

Both saving on legal costs and time efficiency. Yeah. But then when you start to really ramp up your business, think about long and hard about the type of lender you wanna work with, and of course the kind of facility that would best suit your business. And that’s definitely a trend that I’ve been seeing lately is that people are able to negotiate more once they get more equity dollars under their hood.

Amazing, Mehak first off, it’s been great having you on the show today. I just wanna ask what’s next? What’s next for you? What’s next for legal scale? I. Honestly, we love growing the ecosystem. What we’ve been seeing lately is a lot of players emerge and a lot of the same players over and over again.

So I’d love to connect with lenders that I’ve been working with or working across from, and just continue to grow the pie really, because this debt finance. Practice, especially in the mid-market, is booming right now and we’re we’re lucky to have the wind in our sails and I’d be even luckier to tie some other boats along with the, with us for the ride.

Amazing. And so speaking of that, how do people connect? How do they follow up? Absolutely. So they can always go to our website, legal scale.com and you’ll see all of our attorneys and team members and our bios and emails. Me specifically, you can reach out to me at Meek, MEHA k@legalscale.com and I’d be more than happy to get on the phone and just talk through ways that we can assist.

Fantastic. And for everybody watching, just so you know, we’ll definitely put the links to the website, all that good stuff in the show notes. So you can just click on the notes on and on the, on the link on the website, and head right on over. And speaking of the audience, if this is your first time with Mission Matters and you haven’t done it yet.

Hit that subscribe or follow button. This is a daily show. Each and every day we’re bringing you new content new ideas, and hopefully new inspiration to help you along the way on your journey as well. So again, hit that subscribe or follow button. And maek, it’s been really a pleasure. Thank you for coming on the show.

Thank you for having me. This is great.