Warrants and equity kickers
Why lenders take equity options, how coverage is calculated, and the two numbers worth negotiating.
A lender charging 10% on a portfolio where some borrowers fail cannot make its return on interest alone. The warrant is how the winners pay for the losers.
How coverage is calculated
Coverage is quoted either as a percentage of fully diluted equity or as a percentage of the facility amount converted into shares at the last round price. The second is more common and less intuitive: 20% coverage on a £10m facility means £2m of warrants struck at your last valuation, not 20% of your company.
0.5–2%
Typical warrant coverage as a share of fully diluted equity
The two numbers to negotiate
- Coverage. The obvious one, and the one lenders expect to move on if the rest of the package holds.
- Strike price. Struck at the last round is standard. Struck at the next round is better for you and worth asking for, particularly if a round is close.
What to check in the documents
The expiry, which commonly outlives the loan by five years or more. The treatment on a change of control, which decides whether the lender is paid out or rides along. And whether the warrant carries anti-dilution protection, which is where an apparently small number quietly becomes a larger one.
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Preparing for a lender process
The data room, the model, and the questions to expect.
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