Stock Warrants vs Stock Options: Complete Guide for Founders [2025]

Key takeaways: Warrants vs stock options for your company

• Stock options are given to employees as part of their total compensation, while warrants are issued to investors and lenders during fundraising rounds or financing deals.
• The strike price of stock options must equal the fair market value at the time of grant, and warrants can be priced below, above, or equal to FMV, depending on the terms agreed upon. 
• Options are usually non-transferable and stay with employees, but warrants can be sold or transferred to others.
• Use options to retain talent; use warrants to raise capital without immediate equity dilution.

TL;DR Warrants vs stock options differences 

What are stock warrants?

A stock warrant is a contract between two parties that provides the holder the right to purchase the company's shares at a fixed price before a set expiration date. You set this strike price when issuing the warrant, and it stays locked throughout its lifespan.

The holder gets a warrant certificate that shows their purchase rights, not actual ownership. It includes the strike price, share quantity, and expiration date. Exercising the warrant is optional and can be done at any time before expiry. 

Warrants are usually issued to investors or lenders when raising/borrowing capital.

How do stock warrants work? 

Warrants are often issued alongside convertible notes, venture debt, or equity financing as an added incentive. They give the holder the right to purchase equity in the future at a pre-agreed price.

When used alongside equity deals, they supplement the investor’s existing equity stake, while in debt deals, they offer optional equity exposure without requiring an upfront equity investment.

By offering warrants, companies can often negotiate lower interest rates or longer repayment periods on venture debt or convertible notes or better valuations in financing rounds.

Warrant holders benefit from the option to buy the company’s stock at a lower price in the future.

Here’s an example: Your company issues a warrant to an investor allowing them to purchase 500 shares at $8 per share within the next seven years. Three years later, your company's shares are valued at $25 each.

The investor exercises the warrant, pays $4,000 ($8 × 500 shares), and immediately owns shares worth $12,500 ($25 × 500 shares), gaining $8,500 in value.

Pros and cons of stock warrants

Like any financial instrument, warrants come with both benefits and risks that you should consider before issuing them:

What are stock options?

Stock options are a type of equity compensation issued to employees, consultants, or other service providers. They give the holder the right to purchase company shares at a pre-determined (strike/exercise) price in the future, typically after meeting vesting conditions.

The key difference between warrants and options is that:

Options are part of the employee compensation plan, follow standardized vesting schedules and tax rules, and are tied to employment. But, warrants are deal instruments used for fundraising or partnerships, may or may not vest, and are issued to external parties like investors or advisors.

How do stock options work? 

Unlike warrants, you don't issue stock options to raise capital; you use them to compensate and incentivize your team. These come with vesting schedules, meaning employees only earn these options over a certain period. Once the options vest, employees can exercise them and receive company shares.

You issue stock options during hiring, annual compensation reviews, or when trying to retain valued employees. Early-stage companies frequently use options to compensate for lower salaries, giving employees potential upside if the company succeeds.

Here’s an example: You grant an employee 1,200 stock options at $5 per share (exercise price), vesting over four years (300 options annually) with one year cliff. After two years, 600 options have vested. 

Say your company's shares are now worth $18 each. The employee can now exercise their vested options, pay $3,000 ($5 × 600 shares), and receive shares worth $10,800 ($18 × 600 shares). So, the value gain is $7,800.

Pros and cons of stock options

Here are the advantages and drawbacks of stock options that you should evaluate:

Types of stock options

You can issue two main types of stock options, each with different rules and tax implications:

Incentive Stock Options (ISOs) are a type of stock options that can only be granted to employees on your payroll.

ISOs allow employees to defer taxes at the time of exercise and, if certain conditions are met, pay only long-term capital gains tax on the difference between the sale price and the strike price. 

However, this preferential tax treatment applies only if:

• Employees hold ISOs for at least two years since exercise and one year since grant
• The options are exercised within 90 days after the employee has exited

Non-Qualified Stock Options (NSOs) offer more flexibility than ISOs. You can grant NSOs to employees, directors, contractors, service providers, or even investors. But, they don’t give you the tax edge of ISOs.

When your employees exercise NSOs, they must pay income tax on the spread between the FMV and the strike price. Employees also owe capital gains tax when they eventually sell the shares.

💡Quick tip: Choose ISOs for core employees you want to reward with tax-advantaged equity. Use NSOs for contractors, advisors, or when you need more flexibility in grant terms.

Stock warrants vs stock options: When are they similar?

Before we explore how warrants and options differ, it's worth understanding what they share. 

a. Locked-in exercise price: Both instruments let holders buy shares at a predetermined price that doesn't change after issuance. Whether your company’s stock shoots up or crashes, the exercise price stays what you originally set.

b. Expiration deadlines: Both eventually become worthless if unused. Warrants typically last much longer than options, but both have expiration dates. Miss the deadline and holders lose their purchase rights entirely.

c. Optional exercise: Holders can choose whether or not to exercise their rights. They only exercise when it makes financial sense.

d. Value driven by similar factors: Intrinsic and time values influence both warrants and options’ value. Intrinsic value comes from the gap between the current stock price and the exercise price. Time value reflects how much potential remains before expiration (more time = more value since stock prices could still move favorably).

Stock warrants vs stock options: Key differences explained

Now, warrants and options sound nearly identical. But the devil's in the details, and these differences matter for your business.

a. Who receives them

• You typically issue stock options to employees, consultants, or advisors — people working directly with your company who you want to retain long-term. 
• Warrants are issued to investors, banks, or lenders as part of financing deals or loan agreements.

b. Issuing party and structure 

• The company issues stock options to employees as part of their compensation package. But warrants can be issued by the company or third parties, such as investment firms. 
• Options follow standardized terms within your stock option plan, while warrants offer flexible, negotiable terms customized for each transaction.

c. Dilution impact 

• Stock option exercise creates new shares but usually draws from existing employee option pools you've already allocated. 
• Warrant exercise also generates new shares. But, since these typically aren't pre-reserved, they potentially cause ownership dilution for existing shareholders. 

d. Exercise price rules 

• Stock option exercise prices must equal your company's FMV at grant in the U.S., determined through 409A valuations. 
• Stock warrant exercise prices are more flexible and negotiated as part of the issuance terms. You can set warrant prices below fair market value, offering greater upside potential.

e. Expiration timeline 

• Stock options typically expire ten years after you grant them, providing substantial but defined timeframes for exercise. 
• Warrants can last anywhere from several years to multiple decades, giving holders extended decision-making periods.

‍f. Transferability 

• Stock options cannot be transferred: only the original recipient can exercise them, ensuring benefits stay with the intended employees. 
• Warrants allow transfers and sales to other parties, providing liquidity options for holders before exercise.

Warrants or options? The best bet for your company

The answer depends on who you're trying to incentivize and what you're trying to achieve. 

When to choose stock options

Use stock options when your goal is to hire and retain competitive talent.

Options work well for building your core team since they create direct ownership stakes that motivate people to stick around and perform.

Stock options (ISOs) also offer tax advantages for employees in certain situations, making them attractive compensation tools. Also, they're easier to administer since most people understand how employee stock options work.

When to choose warrants

Warrants work especially well for capital-raising situations (especially in early-stage companies) since they can make deals more appealing to investors or lenders by offering upside potential. Recipients often benefit from longer expiration periods. e

They also provide flexible equity arrangements without immediate dilution.

Take control of your cap table with EquityList

When to use warrants versus options is the foundation; the real work begins when managing them properly.

Both instruments exist on your cap table, but tracking them accurately becomes critical as you scale. Manual spreadsheets break down fast when you're juggling employee options, investor warrants, and compliance deadlines. You need a system that can handle this complexity.

EquityList provides a comprehensive solution for managing both warrants and stock options alongside your convertibles and RSUs. Get clear visibility into all your equity instruments — track issuances, exercises, expirations, and compliance requirements in one place. 

Whether you're issuing your first employee options or preparing warrants for your next funding round, get your equity management right from the start. Book a consultation with us today.

FAQs on warrants vs options

1. What is the difference between warrants and ESOPs?

Warrants are issued to investors, banks, and external parties as part of financing deals. ESOPs (Employee Stock Ownership Plans) or employee stock options are issued to employees, consultants, and service providers as part of their compensation. Warrants help raise capital while ESOPs retain talent.

2. Do stock warrants expire?

Yes, stock warrants have expiration dates. Warrants typically have long expiration dates, and it's not uncommon for a warrant to expire five, 10, or 15 years from the date it's issued. Once expired, warrants become worthless if not exercised.

3. Can I sell stock warrants?

Yes, warrants are often transferable, meaning holders can sell them to others before exercising. This differs from stock options, which are generally non-transferable and must stay with the original recipient.

4. Can warrants be issued to employees?

Companies issue warrants typically to outside parties like investors and banks. But stock options, on the other hand, are issued to employees, consultants, advisors, or other service providers.