From the moment he became de facto head of the Department of Government Efficiency, Elon Musk seemed intent on carving up the federal bureaucracy like a Thanksgiving turkey. Thousands of federal employees were laid off, entire departments folded, and contracts worth billions of dollars were scrapped.
That mayhem created a lucrative opening for one startup.
In the first half of this year, Legalist, a San Francisco lender founded by one of tech billionaire Peter Thiel’s fellows, extended more than $100 million to dozens of government contractors scrambling for cash. Founder Eva Shang says that’s about twice what it deployed in the three years since launching its government business.
The company has doubled its origination team to meet demand, Shang said, and closed $40 million from new investors in June to expand the strategy.
Legalist is best known as a litigation funder. It uses algorithms to scan court dockets, backs cases it thinks are likely to win, and takes a cut of any settlement.
In 2022, at the urging of an investor tied to a university endowment, it branched into “government receivables,” providing upfront cash to contractors for goods or services they’ve already delivered but haven’t yet been paid for. Legalist takes its cut when the government eventually settles up.
That sideline became a profit center under the Trump administration, as contract terminations, stop-work orders, and spending freezes choked off cash for contractors.
DOGE says it’s canceled about $58 billion in contracts, while a recent Politico analysis said that number was inflated by “accounting tricks” and claims that couldn’t be verified. The White House defended DOGE’s math, but Politico said it could identify $1.4 billion in money that was actually clawed back from contractors through July.
The White House did not respond to a request for comment from Business Insider.
Federal rules let contractors recover money when policy shifts derail their work — either by adjusting the contract if the pause drove up costs, or by settling up if the job is canceled.
But in the meantime, those contractors have bills to pay, creating a billion-dollar opportunity for private credit lenders like Legalist and its largely regional competitors. (Shang says the company targets an interest rate of at least 12%, above the cost of capital at traditional banks.)
Legalist now has over 50 borrowers. One is a privately held international developer that incurred nearly $200 million in debt for services already rendered after Trump’s sweeping freeze on foreign aid payments. Another is a manufacturer of aerospace engine parts that contracts with both the Department of Defense and private-sector clients.
In March, the Pentagon moved to slash over $580 million in programs, grants, and contracts.
Where Musk’s cost-cutting frenzy whipped the contracting world into a maelstrom, Legalist has ridden the wave to new heights. Call it a DOGE bump.
Earlier this year, a group of foreign aid groups sued the Trump administration for refusing to spend billions of dollars that Congress had budgeted for federal grants and other programs. Federal judges then ruled to block parts of the funding freeze from taking effect.
An appeals court has now allowed the freeze on foreign aid payments to stand, not because the withholding is lawful, but because the plaintiffs did not have the legal standing to sue. (The decision doesn’t alter federal rules letting contractors recover their costs, says Brian Rice, general counsel of Legalist.)
Shang says the ruling is unlikely to affect Legalist’s pipeline. That’s because the lawsuit pertains to federal grants and other programs, not the contracts that Legalist funds against.
“Some of the grants that Trump canceled, he’s well within his right to cancel,” she said.
The decision does, however, seep uncertainty into Legalist’s world — a dynamic that could keep up demand for its advances, even as it makes collecting on them murkier.
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