Startup Funding Espresso -- Use of Warrants in Venture Debt

Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.

Warrants give the holder a number of shares to be exercised over a specified period to buy the company’s stock. 

Warrants play a key part in venture debt.

Companies offer warrants in exchange for a lower interest rate on the debt.

Investors offering venture debt use warrants to gain access to the equity upside of the business.

As long as the company is solvent, the warrant will have some value. 

Warrants are often offered at levels below the current market price.

There are challenges with warrants. 

They are tied to the performance of the company’s stock price which fluctuates.

They don’t last forever as they have an expiration date.

They don’t give the investor any control rights in the company.

They don’t offer any dividends.

Venture debt providers typically offer debt at 10-20% warrant coverage.

Warrant coverage is that portion of the loan taken in the form of warrants.


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