Last Updated: January 6, 2022

Equa Global Asks: When To Issue a Warrant?

The last blog discussed what a warrant is and how it compares to stock options. If you have not had a chance to read Warrants vs. Stock Options by Equa and have questions about what a warrant is, check it out. In summary, warrants are usually issued to third parties and at lower prices than stock options.

Obtaining a bank loan:

Banks sometimes ask for a warrant from a company when entering a loan agreement. When a bank is issued a warrant, they often time lower interest rates or change the payment term of the loan (which can be helpful for the company obtaining the loan). This is because they are being assured of future equity in the company by obtaining warrants.

Early Fundraising:

For a starting business, early funding means finding investors. Warrants can satisfy investors when they ask for an ownership percentage. As an incentive for an investor to invest more, a compromise of issuing more warrants can be used.

Reward or Incentivize Partners:

Partnership agreements can be crucial to the success of a business and it is important to build strong relationships with partners. Warrants can be used to incentivize partners to prioritize projects or to strengthen relationships. When making deals, issuing a warrant can be used to strengthen company offers as well. In summary, any business interaction between a partner or third party and a company can be manipulated using a warrant.

Warrants are useful when acquiring equity from a bank or investors and in partnerships. When issuing a warrant it is important they are structured correctly. Key factors are stock type, exercise price, term, and vesting. When a company issues warrants to any party and it is not structured properly, it can lead to bad partnerships or losing equity.

For more information, check out Equa’s other blogs or services.