A warrant is a contract to buy shares later at a price fixed today (the exercise or strike price). Startups issue warrants as sweeteners in financings, lending arrangements, and strategic partnerships.
Warrants vs stock options
| Attribute | Warrant | Employee Option |
|---|---|---|
| Issued to | Investors, lenders, partners | Employees, advisors |
| Source | Contract with the company | Equity incentive plan / option pool |
| Typical term | 5–10 years | 10 years, subject to employment |
| Vesting | Usually none or milestone-based | Time-based (4 years standard) |
Where founders encounter warrants
- Venture debt — lenders take "warrant coverage" of 5–20% of the loan value as upside participation; a $2M loan with 10% coverage means warrants to buy $200K of shares
- Bridge financings — note holders sometimes receive warrants as additional compensation for risk
- Strategic and commercial deals — a large customer or channel partner may earn performance warrants that vest as revenue milestones are hit
- Banks and service providers — SVB-style banking relationships historically included small warrant positions
Cap table impact
Warrants are dilutive and belong in your fully diluted share count. They are easy to forget between issuance and exercise — surface them in every financing model and data room. At acquisition, in-the-money warrants are typically net-exercised and paid out; out-of-the-money warrants expire worthless.
Negotiating tip
On venture debt, warrant coverage is one of the most negotiable terms: coverage percentage, strike price (last round vs next round), and term length all move with competition between lenders.