Warrants
An often overlooked source of equity financing is the issuance of warrants. A warrant is a contractual right to acquire some shares of a corporation at a specified price for a specified period of time. It is similar to a stock option, but warrants are issued to investors while stock options are issued to employees, officers, and directors.
Warrants are often issued to investors as part of the sale of securities as a sweetener or kicker to an offering of securities. For example, an investor purchasing 5,000 shares of common stock at $1.00 per share would receive a warrant to purchase an additional 5,000 share of common stock at a strike price of $1.00 per share for a three-year period.
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Warrants and the Right to Purchase: The holder of a warrant is not obligated to purchase the shares in the future — they just have the right to purchase them. If the warrant holder fails to exercise the warrant, it expires.
The company must be careful to comply with federal and state securities laws when using warrants. Since the investor will buy the additional shares under the warrant (if they buy them at all), at some point in the future, it is considered a separate offering of securities.
