With a growing company comes growing pains. Knowledge of your company’s equity and how this affects not only you but your investors is important. One example of this is warrants and more specifically when to issue warrants vs stock options. Continue reading for a full breakdown of what a warrant is and how it is different from stock options.
Founding a company you are probably familiar with stock options but what is a warrant? A warrant is an agreement between two parties that allows a party to obtain the other party’s stock at a given price for a period of time. Once a warrant is used, the party gets the shares in the company at the price agreed upon before regardless of what the market price is at that time.
Warrants Compared to Stock Options:
Warrants and Stock options are both contracts that allow holders the ability to sell or buy a company’s stock at a given price over a specific time period. The main difference between the two is the situations they are used in. This depends on the parties involved and the exercise prices.
Different in Parties Issues To:
Stock options are usually issued to people within the company such as employees and advisors or contractors. In these cases, they are used as compensation or incentive. Warrants are not usually issued to these service providers. Instead, warrants are given to third parties, such as investors or banks, when starting a transaction (either commercial or financial).
Different Exercise Prices:
An exercise price is the price agreed upon that the stock or warrant will be purchased for. Generally, the set exercise price for warrants is much lower than for stock options. For stock options, the purchase price is based on fair market value. Warrants are mostly for non-compensatory purposes, therefore the price will be much lower than fair market value.
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