Deal Terms
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Quick Answer
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.
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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.
Understanding Warrants is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Warrants falls under the deal-terms category in venture capital. This area covers concepts related to the financial and legal terms that define investment agreements.
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