Short answer
A venture debt warrant gives the lender the right to buy a small number of a company's shares at a fixed price, usually the price of its last or next funding round. Warrant coverage is the value of those warrants as a percentage of the loan. Warrants are the lender's share of the upside, and they are often settled in cash when the company is sold or lists, so the lender rarely ends up on the cap table.
Key facts
- Coverage: the warrants' value as a % of the facility
- Number of warrants = coverage × facility ÷ strike price
- Strike price: usually the last or next round's share price
- Life: typically 7–10 years
- Usually exercised or cash-settled at an exit, IPO or maturity
Why do venture debt lenders take warrants?
Not every venture debt loan includes warrants, but they are common. Venture debt lenders take more risk than banks: they lend to loss-making companies, often without personal guarantees, against future growth. Interest covers part of that risk. The warrant gives the lender a small share of the upside if the company does well, which lets it keep interest rates lower than they would otherwise be.
What does warrant coverage mean?
Warrant coverage is the value of the warrants, at the strike price, as a percentage of the loan. A £2m facility with 10% coverage gives the lender warrants worth £200,000 at the strike price. Some lenders base coverage on the full facility; others only on the amount drawn, which matters if you draw in tranches.
How is the strike price set?
The strike price is the price per share the lender would pay to exercise. It is usually set at the price of the company's most recent funding round. Some agreements use the next round's price instead, or the lower of the two. A lower strike price means more warrants for the same coverage.
Illustrative example
Illustrative example. A company borrows £2m with 10% warrant coverage. The coverage is worth £200,000. At a £2.00 strike price, the lender receives warrants over 100,000 shares. Five years later the company is sold at £6.00 a share. The warrants are worth (£6.00 − £2.00) × 100,000 = £400,000, which the buyer pays the lender in cash. If the company had been sold below £2.00 a share, the warrants would have been worth nothing.
When are warrants exercised?
Most warrant agreements let the lender exercise at an exit (a sale or IPO), sometimes at a later funding round, and at the end of the warrant's life. In practice most venture debt warrants are cash-settled at an exit: the lender receives the profit on the warrants in cash and never holds shares. The warrant usually lasts much longer than the loan, so it survives after the loan is repaid.
How do warrants affect dilution?
Warrants dilute existing shareholders only by the shares they represent. In the example above, 100,000 shares might be under 1% of the company, compared with several percent if the same £2m were raised as equity. See venture debt vs equity for a side-by-side comparison.
How Nighthawk does it
Nighthawk's warrant coverage is 0–20% of the facility value, with a 7-year life and a strike price aligned to your last or next round. Warrants are usually cash-settled, and we take no board seat.
Related questions
Do warrants give the lender voting rights?
No. A warrant is a right to buy shares later. Until it is exercised, the lender has no shares and no votes.
Is warrant coverage negotiable?
Yes. Coverage, strike price and life are all part of the term sheet. Lenders often trade lower coverage for a higher interest rate, or the reverse.
What happens to warrants if the loan is repaid early?
Usually nothing: warrants typically survive early repayment and keep their full life.