Warrants vs. Stock Options

Posted on 01. Oct, 2008 by in Term Sheets

While many people are familiar with stock options, fewer are familiar with warrants.  Warrants are widely used in the startup world by investors, so it is important for entrepreneurs to understand their nuances.

Let’s start with stock options.  Stock options are created from the Option Pool, which was described in an earlier post.  Warrants are not created from the Option Pool.  They are unique in that they can be used with Preferred Stock.  Both have to be exercised to get voting rights.

Another major difference is that warrants are not tied to an employee’s (or outside Board Member’s) employment time frame. Instead, warrants are typically valid for a longer term (3-7 years) and are transferable during that period.  Stock Options are instead tied to the employee and employment period.

Warrants are often used as an “equity kicker” for investors, meaning that they give upside potential for risk taken by the investor’s.  An example would be a bridge loan utilizing convertible debt.  In the External Links section below there are two good resources provided that go into more detail on how warrants are used in financings.

External Links

Terms of Bridge Loans
Pre-VC investment structures

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  • Sm3317

    I have a question about Options and valuations.  I’m not sure it it’s posted here, if it would possibly get answered?

  • http://www.learnvc.com Jeff Boardman

    Please ask your question, and we’ll try to help out.

  • Dmanhavefun

    I am being offered warrants in a secondary funded start-up.  The warrants are to represent $15k (in lieu of cash) of my first year compensation, and are to be treated by the same guidelines as the B-1 round investors. 
    -with this definition of value, will i owe tax this year, or only at conversion/sale?
    -I will also receive options representing 0.5%, does this reflect any problems?

  • http://www.learnvc.com Jeff Boardman

    Given the detail of the questions, I would refer you to our LinkedIn group discussion. Post your question there, and a variety of experts can weigh in. http://www.linkedin.com/groups/Best-Practices-Startups-Raising-Capital-3932520?gid=3932520&trk=hb_side_g