Financial Glossary
Warrant (Security)
A warrant is a security that gives its holder the right, but not the obligation, to purchase a company's shares at a predetermined price within a set period. Issued by the company itself, warrants create new shares when exercised, which dilutes existing owners. They are frequently attached to debt or other financing as an incentive, giving the holder upside if the company's value grows.
Problem & Application
Founders and early-stage operators often encounter warrants when a lender or investor wants equity upside in addition to interest or a straight equity stake. Issuing warrants can sweeten a financing deal, but it adds future dilution that must be tracked on the cap table and accounted for properly. Understanding the strike price, expiration, and coverage terms is essential before agreeing to attach warrants to a round or loan.
In Short
Warrants are a flexible way to add upside to a deal, but they carry dilution that founders should model before signing.