Warrants

See Also:
Common Stock Definition
Purchase Option
Call Option
Put Option
Synthetic Stock

Warrants Definition

The warrants definition is the right to purchase shares or bonds at a fixed price before there is an issuance in the public marketplace. In this sense, a warrant is like a call option. But there are several key differences.

Warrants Explained

Warrants are often used in finance and investing to make a deal better or provide a premium to potential investors in the company. The ability to buy an asset at a fixed price is a huge benefit if the price is higher because an investor can instantly see a profit. Like options, they expire after an allocated amount of time has passed. However, a warrant expiration could be years in the future as opposed to months, which is common for options.
Another large difference between warrants and options is that a warrant grants the right for an investor to buy stock or bonds before they are issued to the public market. This is why many private equity holders contain warrants. If the company has been a successful venture and is ready to issue an IPO, then the private equity holders have the ability to buy stock before the issuance. This right is a huge benefit if an investor sees a company with great potential. As a result, the investor can turn a huge return on investment.

Warrants Example

For example, Wawadoo Co. is a private company that is looking for investors to fund its newly developed product known as the widget. Widgets are considered the future in the market. And Wawadoo believes they will be a huge success. To incentivize private equity holders, Wawadoo has attached stock warrants in relation to the amount of money invested. The warrants have a life of five years. After three years, the widget has been such a success that Wawadoo is ready to enter into the public marketplace by offering an IPO. As this is happening, the private equity group has exercised its warrant. Thus, Wawadoo must honor the warrant. So, they provide the equity group a stake in the newly offered shares in the market before the actual IPO.
Warrants

ARTICLES YOU MIGHT LIKE

Selling Your Business to a Private Equity Group

Private Equity companies are companies that have raised capital from investors and they have created funds. Each fund may have its own legal mandate. These are common examples of mandates: Invests only in oil and gas companies Is agnostic to what industry it invests in Invests only in companies it controls Private Equity companies come

Read More »

Mining the Balance Sheet for Working Capital

Mining the Balance Sheet for Working Capital Let’s face it… There has been significant liquidity in the marketplace over the past couple of years. Debt and equity capital has been relatively easy to find and commercial banks have been very willing participants as capital providers; however, many of the commercial banks have admitted that this robust marketplace

Read More »

Is Your Business Bankable?

Businesses call us for many reasons but here are two very common reasons why we get called… They are growing and want to strengthen the financial function. OR They are in financial distress and can’t find a way out. Why does a business need to be bankable? What does being bankable mean? In this blog,

Read More »

JOIN OUR NEXT SERIES

Financial Leadership Workshop

MARCH 28TH-31ST 2022

THE ART OF THE CFO®

Financial Leadership Workshop

Days
Hours
Min

September 12-15th 2022

Days
Hours
Min
SHARE THIS ARTICLE

JOIN THE NEXT STRATEGIC CFO™ WORKSHOP SERIES

Strategic CFO™ Financial Leadership Workshop
The Art Of The CFO®

Days
Hours
Min

February 27 - March 2, 2023

Skip to content