Warrants vs. Stock Options
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
