What Are Warrants in Business Financing and How Do They Work?

When researching equity financing, you may come across the term “warrants.” Many entrepreneurs use warrants, as well as stock shares, to finance their businesses. Equity financing lives up to its namesake by selling equity in a business to an investor or investment firm. Stock shares, of course, represent ownership in a business. Rather than taking on new debt, you can raise capital for your business by selling stock shares. Rather than only selling stock shares, though, you may want to leverage warrants as well.

What Are Warrants in Business Financing and How Do They Work?

Overview of Warrants

Warrants are security contracts that give the holder the right but not the obligation to buy or sell shares of the underlying stock. All warrants have an underlying stock. When someone buys 10 warrants for Company XYZ, that person will be able to “exercise” the warrants for stock shares of Company XYZ.

How Warrants Work

Most warrants use a 1:1 conversion ratio for the underlying stock. Each warrant gives the buyer the right to purchase a single share of the underlying stock. If a buyer has 100 warrants, the buyer will be able to purchase 100 shares of the underlying stock. With that said, some warrants allow the buyer to purchase multiple shares and/or partial shares of the underlying stock.

The strike price of a warrant is the predetermined price for which the buyer can purchase the underlying stock. All warrants have a strike price. The buyer has the right but not the obligation to purchase shares of the underlying stock for the strike price of the warrants.

Warrants don’t last forever. Like many other equity contacts, they have an expiration date. Some of them expire in a few months, whereas others expire in 10 or more years. Once a warrant has expired, it can no longer be exercised.

How Businesses Can Leverage Warrants for Financing

Businesses can leverage warrants for financing by including them in equity deals. If you’re thinking about partnering with a venture capitalist, for instance, you may want to offer him or her a combination of stock shares and warrants in exchange for a piece of your business. It will create a more attractive deal for the venture capitalist while only allowing the investor to purchase the underlying stock at the strike price.

This article was brought to you by Intrepid Private Capital Group, a Global Financial Services Company. For more information on startup and business funding, or to complete a funding application, please visit our website.