Warrants and equity kickers in growth lending

A warrant gives a lender the right, but not the obligation, to buy shares under agreed terms. In venture debt it provides potential equity upside alongside interest and fees. HSBC Innovation Banking’s UK venture debt product page explicitly describes this right and the dilution that can occur on exercise.

The warrant is separate from the debt repayment obligation. Do not treat it as a right to convert the loan unless the documents also provide for conversion. To assess the cost, establish how many shares can be acquired, what the holder pays and what happens before the right expires.

The core warrant terms

Read these terms together. Cooley GO’s overview of warrant terms provides legal context for the share number, class, exercise price, duration and exercise mechanics.

Two ways to express warrant coverage

Ask what the percentage measures. A percentage of a loan and a percentage of the company do not describe the same thing. Translate both into shares, then compare them using the same cap table and assumptions.

Coverage relative to the loan

Orrick defines warrant coverage as the ratio of the warrants’ aggregate exercise price to the investment amount. Applied to a loan-based calculation:

Warrant shares = agreed loan amount × coverage percentage ÷ exercise price per share.

For a fictional £2m loan, 5% coverage and a £2 exercise price:

• £2m × 5% = £100,000 of aggregate exercise price.
• £100,000 ÷ £2 = 50,000 warrant shares.

The £100,000 is what the holder would pay to exercise all those shares in cash under this example. It is not an estimate of the warrant’s fair value, and 5% loan coverage does not mean 5% ownership. Check whether the agreement uses committed capital, drawings or another defined amount.

Coverage expressed as ownership

If the commercial agreement instead targets a percentage of the company, the denominator matters. “Fully diluted” must specify the options, warrants, convertibles and any reserved option pool included in the calculation, and the date at which they are measured.

Assume the agreed share count is 10 million before adding a new warrant:

The final figure is a mathematical result before applying contractual rounding or fractional-share provisions. These examples are hypothetical. They show why “0.5%” needs a defined formula, rather than establishing a standard market term.

Exercise price

The exercise price is what the holder pays per share on cash exercise. It may reference the latest equity round, a future financing, nominal value or another negotiated measure.

Keep three quantities separate: the cash needed to exercise, the proceeds after exercise at a particular exit value, and the warrant’s fair value before that exit. In its June 2026 quarterly report, Note 6, Lexicon describes using Black-Scholes to value its warrants, with inputs including volatility and expected life. Multiplying coverage by loan size is not that valuation exercise.

Check how the price changes after share splits, consolidations or other capital reorganisations. Tax and accounting treatment can depend on the instrument and jurisdiction; the simplified calculations below do not determine either.

Share class and rights

The warrant may cover ordinary shares, a preferred class or securities issued in a future round. Those shares can have different voting, dividend, conversion and sale rights.

If the warrant changes into another class on an exit or financing, model that path. Use the amount actually attributable to the relevant class in an exit calculation. Dividing a headline company valuation by a share count may miss rights that affect how proceeds are distributed.

When the warrant is earned

Establish whether the share entitlement is fixed at signing, increases with each drawing or depends on another event. Cooley’s venture debt term-sheet checklist specifically asks whether warrant shares are based on the loan drawn at closing or the whole available facility.

This matters when funding is split into tranches. If a later tranche is never drawn, check whether its related equity entitlement disappears, was never earned, or remains outstanding. Record the issuance and adjustment mechanics alongside the cash availability conditions.

A disclosed warrant example

Lexicon’s June 2026 quarterly report, Note 6 describes warrants associated with its Hercules financing: 2% coverage on funded principal, a $1.59 exercise price and 691,823 shares granted with the first $55m draw. Further drawings carried additional warrant entitlements.

This illustrates why the funded amount matters: the initial warrants related to the $55m drawn, rather than the full $100m facility announced.

The filed form of warrant agreement, dated 4 May 2026, specifies the coverage formula in Section 1 and a five-year term in Section 2. This is one US transaction, not a benchmark for UK coverage or a statement of the latest outstanding share count. Undiluted’s Lexicon financing coverage gives the deal context.

Duration and exercise

The exercise period may outlast the loan. When repaying or refinancing the debt, check the warrant’s own expiry and termination provisions. Do not assume repayment removes it from the cap table.

Cooley’s explanation of cashless exercise describes receiving fewer shares in exchange for not paying the exercise price in cash. Check whether this is available at any time or only on specified events.

Section 3(a) of the Lexicon warrant form provides a concrete net-issuance formula:

Shares issued = warrant shares exercised × (share value − exercise price) ÷ share value.

Use the agreement’s definition of share value and its eligibility conditions. Do not apply the formula mechanically when share value is at or below the exercise price.

Cash exercise and cashless exercise compared

Take the fictional 50,000-share warrant with a £2 exercise price. Assume exercise is permitted, the relevant share value is £8 and there are no adjustments, taxes or transaction expenses.

The simplified net value is the same, but the share count and cash received by the company differ. The table holds the £8 per-share value constant to isolate the mechanics. A full transaction model must also reconcile exercise proceeds and the resulting cap table.

Exit treatment

On a sale, identify whether the warrant will be exercised, settled, assumed by the buyer or terminated. Cooley’s discussion of corporate events explains why sale and IPO provisions need separate attention.

Ask who must give notice, by when, and how the holder participates in deferred or contingent consideration. Do not assume the warrant is dealt with simply because the loan has been repaid. Establish the required steps before agreeing a closing timetable.

Dilution in context

A warrant can affect a fully diluted ownership calculation before any shares are issued. Distinguish that potential dilution from the actual shares issued on exercise. Avoid adding warrant shares twice if they are already included in your starting cap table.

Later share issuance can reduce the warrant holder’s percentage unless the agreed adjustment provisions change that result. Review the actual clauses: adjustments for a share split and protection against a later financing at a lower price address different events.

Compare the warrant with the equity the company might otherwise raise, but include the debt’s repayment obligation in the decision. Our venture debt overview explains the wider product, and venture debt vs venture capital compares the funding choices.

Worked ownership illustration

Assume the same 50,000-share warrant, 10 million shares on the agreed fully diluted basis before this warrant, and full cash exercise. Assume there are no adjustments or other changes to that base.

Ownership percentage alone does not establish the economic outcome. For the same £2 exercise price, assume each scenario below represents the proceeds available per underlying share at an immediate cash exit, with no remaining warrant life. The holder can choose not to exercise when doing so would lose money.

These are hypothetical exit payoffs before taxes and expenses, not fair values at grant or the lender’s overall return. They exclude interest, fees and principal payments. In an actual model, use the appropriate share-class proceeds and the agreed exercise or settlement method.

Negotiation questions

1. 1Is coverage based on commitment, availability, drawings or a defined ownership percentage?
2. 2Does the fully diluted denominator include this warrant, other convertibles and an option pool?
3. 3Which share class is covered, and how are its rights reflected in exit proceeds?
4. 4How are the exercise price, share number and fractional shares handled?
5. 5When does the entitlement arise, and what happens if a tranche is never drawn?
6. 6Does repayment or refinancing affect the warrant, and when does it expire?
7. 7What happens on a sale, IPO, financing or reorganisation, and what notice is required?
8. 8Is cashless exercise available, which valuation formula applies and who bears administrative costs?
9. 9Are information, transfer or registration rights attached?

Assessing the whole offer

Translate the term sheet into shares, ownership and scenario outcomes. Record the cash exercise amount separately from the value transferred to the warrant holder. Then assess those outcomes alongside interest and fees, repayment risk and restrictions on the company.

The term-sheet comparison guide brings these elements together. A smaller coverage percentage is not sufficient evidence of a cheaper overall facility.

Where to go next

• Venture debt interest rates and costs builds a complete view of cash cost, fees and equity-linked value.
• Growth and venture debt term sheets explained shows how to read the whole offer before long-form documents.
• Venture debt vs venture capital compares dilution, repayment risk and strategic flexibility.
• What is venture debt? explains the product, structure and borrower fit.
• How to compare venture debt term sheets helps assess warrant terms alongside the rest of a competing offer.