Stock Warrants: A Complete Guide for Founders

What is a stock warrant?

A stock warrant is a contract issued by a company that gives the holder the right to buy (call warrant) or sell (put warrant) a specific number of shares at a fixed exercise price on or before a stated expiration date.

In simple terms, a warrant is a promise that allows someone to buy your company’s stock in the future at a price you both agree on today.

Warrants give founders flexibility when structuring capital. They can be attached to venture debt, convertible notes, or strategic partnerships to make a deal more attractive.

How stock warrants work

Every warrant agreement includes a few standard terms like:

• Types of stock - A warrant must specify what kind of stock it converts into. This could be common stock or preferred stock
• Number of shares (or percentage of the company) the warrant covers
• Exercise price - the fixed price per share the holder pays to convert the warrant into equity. This is usually set at the prevailing Fair Market Value (FMV) of the company
• Vesting structure - While many investor warrants are immediately exercisable, founders can design vesting conditions when issuing warrants to strategic partners or advisors. These vesting schedules could be time/performance-based
• Expiry or term - typically two to ten years, depending on the deal
• Exercise style - American (can be exercised any time before expiry) or European (can be exercised only at expiry)
• Transferability or restrictions - whether the holder can sell or transfer the warrant to someone else‍
• Exit event treatment - If your company is acquired or goes public, the warrant’s terms dictate what happens next. Most agreements require the company to notify warrant holders in advance, giving them the choice to exercise before closing. Others include automatic conversion or cash settlement clauses. You should negotiate these carefully to avoid last-minute ownership surprises during a sale or IPO.

Example:

Suppose your Delaware C-Corp raises $2Mn in venture debt from a startup-friendly bank. 

As part of the loan terms, the lender asks for a warrant to purchase a small equity stake in your company. The warrant converts into Series A preferred stock and represents 20,000 shares, which equals about 1% of the company on a fully diluted basis at the time of issue. 

The warrant is immediately exercisable at a strike price of $5 per share and remains valid for 10 years from the date of issue.

Five years later, your company raises a large Series C round at $20 per share. The lender decides to exercise its warrant.

Exercise cost: 20,000 shares × $5 = $100,000

Market value of shares at Series C: 20,000 × $20 = $400,000

Unrealized gain: $400,000 − $100,000 = $300,000

The lender pays $100,000 to your company, which issues 20,000 new Series A shares. You receive fresh capital and the lender realizes an equity upside worth $300,000.

This example shows how warrants give investors leveraged exposure to your company’s future growth. If your valuation rises, the warrant becomes valuable; if it doesn’t, the warrant simply expires. That asymmetric payoff is what makes warrants attractive for investors and strategic for founders when structuring deals.

Types of stock warrants 

The basic mechanics of stock warrants are similar, but their structure and purpose can vary depending on the deal.

1. Warrants attached to venture debt

When a startup raises venture debt, the loan agreement can include a small equity warrant.

This warrant acts as an equity kicker, compensating the lender for the higher risk of lending to an early-stage company. In exchange, the company may secure lower interest rates, longer repayment terms, or more flexible covenants.

For the founder, it’s a trade-off: a modest dilution later in exchange for better financing terms today.

2. Warrants linked to convertible notes or SAFEs

When raising early capital through a convertible note or SAFE (Simple Agreement for Future), founders sometimes add a warrant to make the investment more attractive.

The convertible note or SAFE already gives them discounted equity in the next round, but a warrant adds more upside if the company performs well. It acts as a “bonus” equity option that sits outside the note’s conversion terms.

For founders, a warrant can help close a deal faster or bridge valuation gaps without increasing the discount or lowering the cap on the note.

3. Warrants for strategic or advisory partnerships

Startups sometimes issue warrants to strategic partners or advisors who deliver value beyond cash. These are performance-linked: the warrant vests or becomes exercisable when specific milestones are met. 

Across these use cases:

1. Warrants are almost always call warrants (rights to buy shares).
2. They are non-listed and privately negotiated, unlike exchange-traded warrants.
3. They represent potential dilution, so it’s best practice to model them in your fully diluted cap table even before they’re exercised.

Stock warrants vs stock options

Warrants and stock options often sound similar. Both give someone the right to buy company shares at a fixed price in the future, but they serve different purposes and are issued to different people.

Who receives them

Stock options are designed for employees, consultants, and advisors as part of compensation. Warrants are issued to external parties such as investors, lenders, or strategic partners as part of financing or commercial agreements.

Why they are issued

Options are primarily a compensation tool. They align employee incentives with company performance and are governed by tax rules such as ISOs (Incentive Stock Options) and NSOs (Non-Qualified Stock Options) under the U.S. Internal Revenue Code.

Warrants, on the other hand, help close fundraising or lending transactions by offering additional upside to outside parties without changing the main deal terms.

Who issues them

Both instruments are issued by the company, but their intent is different. Stock options come from a predefined employee option pool, while warrants are usually created for specific transactions.

How they affect dilution

When options are exercised, the shares come from the employee pool, so the dilution is already accounted for. Warrants usually sit outside that pool, which means they create new dilution when exercised. It is important to include them in your fully diluted cap table even if they have not been converted yet.

Vesting

Most employee options vest over time to encourage retention. Warrants may or may not vest. They are often exercisable immediately unless they are tied to performance milestones.

Pricing and valuation

Under U.S. tax law (IRC 409A), stock option exercise prices must equal or exceed the company’s FMV on the grant date. This protects employees from adverse tax treatment.

Warrants, however, offer more flexibility. Their exercise price can be set at, above, or below FMV, depending on what the company negotiates with the investor or lender.

Term and expiry

ISOs and NSOs typically have a maximum term of 10 years from the grant date. Employees can exercise vested options anytime during that term.

When an employee leaves, ISOs must be exercised within 90 days to retain their tax-advantaged status; otherwise, they convert to NSOs.

Warrants generally have a similar or slightly longer lifespan, often two to ten years, though some agreements extend further depending on the deal structure.

Transferability

Employee stock options are non-transferable under U.S. securities and tax law, except in limited cases such as inheritance. Unexercised options expire after the post-termination window if not exercised.

Warrants, however, are transferable instruments and may be sold or assigned to another party, subject to company approval and compliance with securities regulations. 

FAQs on stock warrants

1. Are stock warrants good or bad? 

Neither good nor bad on their own, warrants are simply a tool. For founders, they can be a practical way to attract investors, lenders, or strategic partners without issuing equity upfront. For investors, warrants provide optional upside, allowing them to benefit from future growth without committing capital immediately.

2. How do you redeem a stock warrant?

Redeeming, or exercising, a stock warrant means converting it into actual shares of the company. The process is usually straightforward but must follow the terms outlined in the warrant agreement.

To exercise a warrant, the holder submits a warrant exercise notice to the company, specifying how many shares they want to purchase. They then pay the exercise price for those shares, either in cash or, if allowed, through a cashless exercise where part of the warrant’s value is used to cover the payment.

Once the payment and documentation are received, the company issues the corresponding shares to the holder and updates the cap table to reflect the new ownership.

3. What is a share warrant with an example?

A share warrant is a financial instrument that gives the holder the right, but not the obligation, to purchase a company’s shares at a fixed price within a specific time period.

Companies issue share warrants as part of financing deals or incentive arrangements. 

For example, a company might issue a warrant to an early investor allowing them to buy 1,000 shares at $2 each anytime in the next five years. If the company’s share price later rises to $6 per share, the investor can exercise the warrant, purchase the shares for $2 each, and realize a $4 gain per share, reflecting the upside from the company’s growth.

4. What is the difference between a warrant and a stock option?

A stock warrant and a stock option both give the right to buy company shares at a fixed price in the future, but they are used in different situations.

Warrants are usually issued as part of a financing or business deal. They act as an incentive or “sweetener,” giving outsiders potential equity upside without immediate ownership. 

Stock options, on the other hand, are granted to employees, advisors, or consultants as part of compensation. They are meant to retain and reward people who contribute to building the company.