Warrant Coverage

Categories: Investing, Derivatives

See: Warrant.

Unlike the bad kind of warrant, “warrant coverage” is an agreement from the financial derivative that’s called a “warrant.” A warrant in Financeland gives the warrant-holder the right to buy the underlying stock at a predetermined price before or at maturity. The concept parallels that of a “warranty”...the kind you get with some products: a guarantee of money you get if you exercise the warrant(y).

Typically, when a high-growth, early-stage company needs cash but doesn't want to sell valuable equity and dilute ownership dramatically, they seek out venture debt. When a bank loans money to a startup in this manner, typically they will loan cash at some high-ish interest rate. Think: $3 million at 10% interest. Then, in addition, the bank will receive some form of warrant coverage. Like...for every million dollars of loan, the bank receives 100,000 warrants into buying the equity of the company, such that if the company does exceedingly well, the bank then participates in the upside, far beyond what the 10% interest was they were collecting on their loan along the way. This "spiff" in warrants is warrant coverage above and beyond the loan.

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Finance: What is a Warrant?8 Views

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Finance allah shmoop what is ah warrant Oh it's Acute

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option Like kind of a stock option Light Yeah That's

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How to think about it anyway Okay Okay It pretty

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much feels just like a stock option And yes there

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are put warrants and call warrants in the same vein

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as put options and call options So then what's the

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diff why don't we just call a warrant a stock

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option Well warrants have you know their own little characteristics

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here and they're usually issued by the company itself where

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a stock options on say microsoft will They can be

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issued by anyone who deals in options like goldman morgan

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ups sumitomo whoever whatever investment bank that makes capital markets

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trading happened they can issue options trade him have a

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spread and then make profits in them and there's nothing

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the company can really do about it They can all

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create derivative securities on stocks or bonds of their own

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volition And the company itself just kind of stands there

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looking by and wondering why they didn't get into the

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investment banking business Well goldman morgan and the others then

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offer trading in those options on exchanges in regular form

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Such that many buyers and sellers generally come together liquid

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lee to trade and you know generate profit margins for

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the desks of the bank's trading the securities right The

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banks are basically the casino house and they end up

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making most the money most of time Got that Okay

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another difference warrants and options here Warming's can last five

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ten twenty years that's Usually how many weeks options last

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and the question remains Why would a company issue what

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are essentially cheap stock options too Others to buy slices

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of its own pie While the answer as with most

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of these types of company deals is that the company

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has to issue those warrants to get a deal done

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like you know to settle a patent dispute or created

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distribution or manufacturing partnership or some of their tactical arrangement

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to make the good better and to make the problems

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go away well warrants generally or simply held for the

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duration of the partnership or of the company's existence is

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an independent and city well and conversely options are traded

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liquid leon exchanges all over the world and they can

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be sold without a whole lot of discussion with company

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Here this kind of warrant which gives you the right

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to throw a piece of paper in your own financial

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asset jail Very different kind of warrant than this one 00:02:18.383 --> [endTime] You stay away from the arrest warrants

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