How can Warrants Help you Close a Deal?

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Bottom Line: Warrants are often used as additional inducement for early investors to invest in a company and can be used to bridge the gap in perceived execution risk between the founders and the early stage investors.

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How can Warrants Help you Close a Deal?

  1. 1. ByTREVOR CROW www.biztaxbuzz.com How can Warrants Help you Close a Deal?
  2. 2. Overview  Investing in early stage companies is a difficult balancing act of risk vs. the potential for future reward.  Warrants are often used as additional inducement for early investors to invest in a company.  A company may issue warrants by themselves or may include them as part of a deal for investors purchasing debt securities or preferred stock.
  3. 3. What is a Warrant?  A traditional warrant provides the holder the right, but not the obligation, to purchase a specified number of shares of common stock of a private company, during a specified time period, at the fair market value of the shares at the time the warrant is issued.  The anti- dilution provisions in a warrant are the most heavily negotiated provisions.  The purpose of an anti- dilution provision is to protect the holder from being diluted because the company issues additional equity in the future.
  4. 4. Startup Example Deal  Early stage investors commit to a company’s Series A funding round and receive warrants equal to 25% of their initial investment that expire in one year.  In other words, the early stage investors have the ability to purchase up to 25% of the total number of shares they initially purchased at the same price per share as their initial investment, provided that they exercise the warrants within the one- year period.
  5. 5. Why use Warrants?  There is always a risk that any deal will not be executed and become profitable. For startups this is usually a big risk.  Even when the investors are excited about the idea, they remain uncertain about how the company will perform after making an investment.  Warrants allow investors to observe how the company performs against projections before deciding whether they want to make an additional investment at the same price that they initially invested.  Needless to say, investors like to be able to use the benefit of hindsight prior to making additional investments.
  6. 6. Bottom Line  Warrants are often used as additional inducement for early investors to invest in a company and can be used to bridge the gap in perceived execution risk between the founders and the early stage investors.
  7. 7. THANK YOU!

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