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Warrants
Also called: warrant, stock warrants, warrant coverage, warrant inducement
Contracts issued by a company that let the holder buy new shares at a fixed exercise price until an expiry date, often five years out.
Explanation
A warrant works like a long-dated call option, with one difference: when it is exercised, the company issues brand-new shares and receives the exercise price in cash. Small-cap offerings often attach warrants to each share sold. “100% warrant coverage” means one warrant per share, so a 10-million-share deal can bring another 10 million shares later.
Terms matter. Many warrants allow cashless exercise (the holder receives fewer shares without paying), and some carry price protection that cuts the exercise price after a later, cheaper deal. When warrants are far out of the money, companies sometimes offer an inducement, a lower exercise price or new warrants in exchange for exercising now, which raises cash and adds shares at once.
Accounting can be noisy too. Warrants classified as liabilities are marked to fair value every quarter, so a falling share price can produce a non-cash gain that makes a loss-making company look profitable.
Why it matters
Outstanding warrants are future dilution. When the stock rises toward the exercise price, holders exercise and sell, which tends to cap the price there.
How Equity Dictionary measures it
Warrants outstanding, as tagged in the company’s XBRL data, are part of the overhang factor and table. Warrant and option exercises count toward the financing factor’s +10 adjustment when stock sales and exercises over the last four quarters exceed 25% of market cap. Because a warrant revaluation can turn a loss into a reported profit, the distress factor counts a loss when either net or operating income is negative.
Related terms
- Pre-funded warrants: Warrants sold for almost the full share price up front, leaving a nominal exercise price such as $0.0001, used in place of shares for buyers near an ownership limit.
- Overhang: Shares that could be added to the market from warrants, options, convertibles and unvested stock awards, which tends to weigh on the share price.
- Registered direct offering (RDO): A sale of registered shares negotiated directly with a few institutional investors through a placement agent, usually at a discount and closed within a day or two.
- Convertible notes: Debt that the holder can exchange for shares at a set conversion price, so a loan today can become dilution later.
- Dilution: The shrinking of each existing shareholder’s ownership stake when a company issues new shares.
Plain-English summary for research; not legal or investment advice.