Deal Terms
Warrants
Financial instruments giving the holder the right to purchase shares at a predetermined price before expiration.
Warrants are derivative securities that grant the holder the right, but not the obligation, to buy company shares at a specified strike price within a set time period. In venture capital, warrants are commonly attached to venture debt as additional compensation for lenders, and sometimes used in strategic partnership agreements. They function similarly to stock options but are issued by the company rather than through employee compensation plans.
In Practice
A venture debt facility includes warrants for 0.5% of the company's fully diluted shares at the last round's price, exercisable for 10 years. If the company IPOs at 10x the strike price, the lender profits significantly.
Why It Matters
Warrants add equity upside to debt instruments, compensating lenders for the higher risk of lending to unprofitable startups. They're a standard feature of venture debt terms.
Related Concepts
Further Reading
What 'Fully Diluted' Means and Why Employees Should Care
Your "1% ownership" might actually be 0.6% on a fully diluted basis. Here's what fully diluted means, how option pools dilute everyone, and how to calculate your real ownership.
Venture Debt Explained: When It Makes Sense and When It Doesn't
A comprehensive guide to venture debt — how it works, what it costs, when founders should take it, and the critical term sheet provisions that separate good deals from dangerous ones.
Anti-Dilution Provisions Explained: What Every Founder Needs to Know
How anti-dilution provisions work in venture capital — full ratchet vs. weighted average, how they affect founder ownership in down rounds, and what to negotiate in your term sheet.
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