Warrant Coverage
Categories: Investing, Derivatives
See: Warrant.
Unlike the bad kind of warrant, “warrant coverage” is an agreement from the financial derivative that’s called a “warrant.” A warrant in Financeland gives the warrant-holder the right to buy the underlying stock at a predetermined price before or at maturity. The concept parallels that of a “warranty”...the kind you get with some products: a guarantee of money you get if you exercise the warrant(y).
Typically, when a high-growth, early-stage company needs cash but doesn't want to sell valuable equity and dilute ownership dramatically, they seek out venture debt. When a bank loans money to a startup in this manner, typically they will loan cash at some high-ish interest rate. Think: $3 million at 10% interest. Then, in addition, the bank will receive some form of warrant coverage. Like...for every million dollars of loan, the bank receives 100,000 warrants into buying the equity of the company, such that if the company does exceedingly well, the bank then participates in the upside, far beyond what the 10% interest was they were collecting on their loan along the way. This "spiff" in warrants is warrant coverage above and beyond the loan.
Related or Semi-related Video
Finance: What is a Warrant?8 Views
Finance allah shmoop what is ah warrant Oh it's Acute
option Like kind of a stock option Light Yeah That's
How to think about it anyway Okay Okay It pretty
much feels just like a stock option And yes there
are put warrants and call warrants in the same vein
as put options and call options So then what's the
diff why don't we just call a warrant a stock
option Well warrants have you know their own little characteristics
here and they're usually issued by the company itself where
a stock options on say microsoft will They can be
issued by anyone who deals in options like goldman morgan
ups sumitomo whoever whatever investment bank that makes capital markets
trading happened they can issue options trade him have a
spread and then make profits in them and there's nothing
the company can really do about it They can all
create derivative securities on stocks or bonds of their own
volition And the company itself just kind of stands there
looking by and wondering why they didn't get into the
investment banking business Well goldman morgan and the others then
offer trading in those options on exchanges in regular form
Such that many buyers and sellers generally come together liquid
lee to trade and you know generate profit margins for
the desks of the bank's trading the securities right The
banks are basically the casino house and they end up
making most the money most of time Got that Okay
another difference warrants and options here Warming's can last five
ten twenty years that's Usually how many weeks options last
and the question remains Why would a company issue what
are essentially cheap stock options too Others to buy slices
of its own pie While the answer as with most
of these types of company deals is that the company
has to issue those warrants to get a deal done
like you know to settle a patent dispute or created
distribution or manufacturing partnership or some of their tactical arrangement
to make the good better and to make the problems
go away well warrants generally or simply held for the
duration of the partnership or of the company's existence is
an independent and city well and conversely options are traded
liquid leon exchanges all over the world and they can
be sold without a whole lot of discussion with company
Here this kind of warrant which gives you the right
to throw a piece of paper in your own financial
asset jail Very different kind of warrant than this one 00:02:18.383 --> [endTime] You stay away from the arrest warrants