The Use of Warrants to Attract Investor Capital

Raising private capital successfully depends on numerous variables:  solid company fundamentals, compelling risk – reward, experienced management, and attractive transaction structure. Capital formation is typically based on two primary structures:

(1) equity (common equity, preferred equity, convertible preferred) or;

(2) debt (debentures, convertible debentures)

Successful capital formation is heavily reliant on utilizing the appropriate structure for the specific business, industry, state of operations, and risks involved in a specific offering.  One additional option in developing attractive structure is utilizing warrants.  A warrant is a contract that provides the holder with the option to purchase equity in the Company at a future date and at fixed terms.  Why are warrants an attractive alternative to investors and in what situations are they best employed?

Warrants provide investors the capability to increase their exposure to the company’s equity without initially putting the capital at risk.  This provides the investor the capability to monitor their initial investment with the issuer company, analyze the company’s operational progress, and execute a decision to invest additional capital via the warrants at a later date.  This allows the investor to participate with a larger investment and allows the investor to monitor company progress and only commit more capital when the investor is confident the company is executing properly.

The warrants typically offer compelling terms for the investor allowing them to increase their investment in the Company at an attractive share or unit price.  The warrants will have an exercise period that provides the term for execution of the warrant.  This time frame should provide the investor ample opportunity to monitor the company’s progress and evaluate whether they should participate with additional capital via the warrants.

Warrants work well in situations where the subject company has significant growth potential but also some increased execution risk that makes it daunting for an investor to participate with a significant amount of capital in the early stages of growth.  It provides a compelling incentive for the investor allowing them the capability to leverage significant additional return from the company, assuming it executes properly, without putting all of the investor’s capital at risk early in the execution and growth phase of the company.  When executed properly – adding warrants to your transaction structure can greatly enhance your capability to raise capital from investors.

Interested in raising capital successfully?  Call us today and learn how a properly structured Regulation D offering can help your company capitalize its operations.