Warrant Coverage

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.