How warrants affect ownership and price
When warrants are exercised, new shares are issued, which can mean dilution for existing owners. At the same time, the company receives capital at the predetermined subscription price.
For the holder, the warrant offers an opportunity to benefit from a future increase in value, but only if the share price exceeds the subscription price when the warrant can be exercised.
Key terms of a warrant
Warrants are governed by terms that determine how and when they can be used.
- Predetermined subscription price per share
- Period during which the warrant can be exercised
- Number of shares the warrant entitles the holder to
- Any performance or vesting requirements
- Effects on ownership stake and dilution
When the terms are clear, it becomes easier to assess both the value and the effect on the ownership structure.
Why companies use warrants
Worth bearing in mind
Warrants are used to tie key people and investors more closely to the company's long-term growth in value. Offering the right to buy shares in the future creates a shared interest in growth and value creation.
In unlisted companies, warrants are common in incentive programmes for management and employees, but they can also be used in connection with capital raising to make an offer more attractive.
Frequently asked questions
What is the difference between a warrant and a share option?
A warrant gives the right to buy newly issued shares from the company, whereas a share option often concerns the purchase of existing shares.
Do I have to exercise a warrant?
No, it is a right, not an obligation.
Do warrants affect existing shareholders?
Yes, when warrants are exercised, the new shares can lead to dilution.
Are warrants common in unlisted companies?
Yes, particularly as an incentive for management, employees and early investors.
What happens if the warrant is not exercised in time?
It then expires and becomes worthless.