Like anything in life, it is important to know what something is and does before using it. For example, to use matches, you first must know they create fire and how to light them. The same can be said for warrants. The most important piece of warrants to understand as a company getting ready to use them is the key components that make up a warrant. The components being covered in this blog include; stock type, price, vesting, and term.
There are two types of stock issued with warrants: common stock and preferred stock. Specifying what type of stock is awarded in a warrant is the first step a company must take.
The exercise price is the set price a warrant holder can buy options at for the given amount of time. This will sometimes be at the fair market value. However, usually, warrants are non-compensatory, making their exercise price much lower (some even just a penny).
Not all stock options associated with a warrant have a vesting structure. You will want to include vesting in the stock options you are presenting if they are going to be used as an incentive. Make sure to be specific in the values at which vesting will occur.
Warrants always have a term, meaning the given time the warrant can be used. For many, this is between two and ten years. Once the term is ended. the user can not exercise it. If you are issuing a warrant, knowing who you are issuing it to will want a longer-term. This is so they have longer to decide and judge if the company is worth exercising the warrant given the price.
Warrants will also be affected if the company decides to sell or become public. Generally, this will come with some sort of notice and should be included in the warrant ahead of time.
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