Sweetening the deal: How to use warrants to get the deal done

8 septembre 2021 | Myron A. Mallia-Dare, Genesa Olivieri

( Disponible en anglais seulement )

There has been a significant uptick in the number of startups and emerging companies using warrants to close the gap on various transactions. Startups and emerging companies may wish to issue warrants in a variety of scenarios. When offered in conjunction with effective negotiation, warrants can incentivize third parties to enter transactions or to agree to more favourable deal terms.

A warrant is an agreement between a company (the « Issuer ») and the holder of the warrant (the « Warrantholder »). Warrants entitle the Warrantholder to purchase shares at a specified price within a predetermined period. This article explores the key factors that startups and emerging companies should consider when issuing warrants.

What are warrants?

Warrants are certificates or other instruments issued by a company as evidence of conversion privileges, options or rights to acquire shares of the company at a specific price until a fixed expiration date. Since warrants do not typically entitle the Warrantholder to dividends or voting rights, warrants are valuable solely for their profit-earning potential.

Companies commonly use warrants as an inducement to attract investors or leverage favourable deal terms. For example, warrants are frequently used as « sweeteners » to incentivize investors to invest or to incentivize the lender to loan funds at a more favorable interest rate, whether bank financing or venture debt. Companies may also use warrants when entering into strategic relationships or transactions to encourage the other party to enter into the transaction or buy into the company’s long-term success.

Although warrants are similar in structure and serve a similar function to options, the critical difference is that options are typically issued to internal stakeholders, such as employees, directors, consultants and other service providers, and not to external third parties. Further, as options are typically issued under an option plan, the issuance of these options would need to conform to the terms of that plan. On the other hand, warrants are typically offered to external third parties as described above. For further information about stock options, please read our article: Stocked up: How startups and emerging companies can effectively utilize options to attract and retain talent.

The issuance of a warrant is usually evidenced by way of a document called a warrant certificate. A warrant certificate sets out the essential terms of the warrant, including:

  • the exercise price, the number of underlying shares into which the warrants are exercisable and the term of the warrant;
  • procedures and conditions for exercising the warrant; and
  • adjustment provisions intended to protect the value of the warrant.

Key considerations when issuing warrants:

Types of shares

Before issuing warrants, startups and emerging companies must first determine the type of underlying security the Warrantholder will have the right to acquire. In most instances, warrants are issued for common shares. However, in some instances, the Warrantholder may be entitled to preferred shares. When issued to investors as a « sweetener, » the underlying security will typically match the shares purchased by the investor. For example, outside investors, such as venture capital funds, will commonly only invest if the company is issuing preferred shares that have specific rights, privileges and preferences compared to the common shares.

Number of shares

The number of shares underlying the warrant may be fixed or expressed as a formula. A formulaic approach to calculating the number of shares the Warrantholder may acquire can be a valuable tool to incentivize a third party, such as where the Warrantholder is a strategic sales channel partner. Therefore, the warrant could be structured so that the sales channel partner would have the right to purchase additional shares if it meets specific sales targets. In addition, a formulaic approach may also incentivize a lender to loan additional funds under an existing credit facility. The number of shares the lender may acquire may increase if the startup or emerging company borrows additional funds. However, when using a formulaic approach, startups and emerging companies must carefully consider the dilutive effects of any mechanisms that allow for an increase in the number of shares a Warrantholder may acquire.

Exercise price

The exercise price (the « Strike Price ») of a warrant is the price of each share underlying the warrant. The Strike Price of a warrant can vary dramatically depending on the context in which the warrant will be issued. In certain circumstances, companies will set the Strike Price at or above the fair market value of the underlying securities. In other circumstances, the Strike Price will be set at a nominal value. The Strike Price could also be calculated based on a predetermined formula or future valuation of the startup or emerging company.


The warrant may be subject to anti-dilution provisions, which are intended to protect the Warrantholder’s right to receive the value that was negotiated at the time of issuance of the warrant. Certain corporate actions taken by the Issuer during the term of the warrant may have a dilutive effect on the value of the underlying securities, such as consolidation of the company’s outstanding shares or distribution to shareholders of additional shares by way of dividend. A down round may also trigger price-protective anti-dilution provisions – this occurs where the company issues shares at a lower price per share than had been sold in a prior round. For price-protective anti-dilution provisions, the formula used to determine the manner in which the warrants will be adjusted is often a negotiation point.

Startups and emerging companies must carefully consider how a down-round will impact the warrant terms. Anti-dilution provisions may adjust the Strike Price and/or the number of underlying shares exercisable. The adjustment should be proportionate and reflective of the triggering event and place the Warrantholder in substantially the same position but for the triggering event. Both the Warrantholder and the emerging company must carefully consider how any anti-dilution provisions are drafted. This includes ensuring that there are appropriate carve-outs for predetermined events – such as equity issued as compensation – that do not inadvertently trigger the anti-dilution provisions.


Warrants are exercisable up until a specific time, often referred to as the expiration date or maturity date. The term will depend on many factors, including the nature of the deal. Generally, a longer-term increases the value of the warrant because there is a greater likelihood of the company’s success over time and, therefore, a more significant payout as the shares appreciate.

The term may be subject to adjustment provisions if certain fundamental changes are undertaken by the Issuer during the term of the warrant. For example, triggering events may include an amalgamation, merger or disposition of the Issuer’s assets. In the case of these events, the term of the warrant may accelerate so that each outstanding warrant will, after the completion of such an event, be exercisable for the kind and amount of shares that the Warrantholder would have otherwise been entitled to receive immediately prior to the effective date of the event.

Exercise of warrants

Most warrants will be freely exercisable in whole or in part by paying the cash exercise price. Some warrants also allow for what is called a « cashless exercise. » Cashless exercise entitles the Warrantholder to apply the exercise price against the aggregate value of shares it will receive. This is achieved by decreasing the number of shares the Warrantholder will receive by an amount equal to the exercise price that the Warrantholder would have been required to pay for exercising its warrants.


If used correctly, warrants can be a useful tool to incentivize investors and secure critical relationships with customers, buyers, sellers, and partnerships. However, startups and emerging companies must carefully consider the warrant terms to ensure they effectively support their long-term growth.



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