Warrants are rights to purchase company stock at a set price — often bundled with venture debt or strategic deals as an equity kicker.

How it works

Key terms:

• Strike price: usually near last round preferred price
• Coverage: warrants expressed as percent of loan principal (e.g., 10% warrant coverage on $5M loan)
• Expiration: often 5–10 years
• Exercise: holder pays strike × shares; shares are typically common or preferred per agreement

Example: $4M venture debt with 15% warrant coverage at $1 strike. Lender receives warrants on 600,000 shares ($4M × 15% ÷ $1). If the company exits at $5/share, warrant value adds to lender return beyond interest.

Warrants differ from employee options — different tax treatment, no vesting typically, and holders are outsiders (banks, partners). Fully diluted cap table models should include warrant shares.

Some crypto deals use token warrants analogously — rights to future tokens instead of equity.

Why it matters

• Founders: Debt looks cheaper until you model warrant dilution at upside scenarios. Negotiate coverage, strike, and net exercise provisions.
• Investors: Warrant gains supplement fund returns on credit-heavy portfolios; equity investors watch whether debt warrants sit above their liquidation stack fairly.

Common mistake

Ignoring warrants in exit waterfall modeling. Small coverage percentages compound at high exit multiples and surprise common holders.

Related ideas

See also venture debt, equity kicker, and stock options.