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Issuing
Warrants To Investors
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by:
Dave Lavinsky
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When raising capital for a business venture,
warrants are a common form of equity that is given to investors. A
warrant is like an option – it gives the holder the right to buy a
security at a fixed or formulaic price, which is known as the
"exercise" or "strike" price.
Warrants are often confused with options. Options, as used in the
venture capital space, are typically long term (up to 10 years). They
are also typically issued to employees versus investors. Conversely,
warrants act like short-term options and, unlike employee options, can
be traded as an independent security.
In general, neither the issuance of warrants nor their exercise (at
least by non-employees) is a taxable event. In fact, in 1984, Congress
reversed the earlier position of the IRS that the expiration of a
warrant is a taxable event for the issuer. However, whenever a debt
security with warrants attached is issued as a package, original issue
discount problems are invited.
One type of warrant that once popular as a financing mechanism for
emerging ventures is contingent warrants. These warrants become
exercisable if and when the holder does something for the issuer, for
example buys a certain level of product. Contingent warrants are no
longer used often since the SEC ruled in favor of current and periodic
recognition of expense to the issuer.
Like an option, a warrant is considered a "common-stock equivalent” for
accounting purposes. And, if the warrant has been "in the money" (i.e.,
the exercise price is below the market price) for three consecutive
months, it is deemed to impact earnings per share under the so-called
treasury-stock method. That is, the warrants are considered exercised,
new stock is issued at the exercise price, and the proceeds to the
issuer are used to buy in stock at the market price.
Warrants are a common financing mechanism and companies seeking venture
capital should consider and become knowledgeable about this type of
equity device.
About the author:
GT Business
Plans has developed over 200 business plans for clients that
have collectively raised over $750 million in financing, launched
numerous new product and service lines and gained competitive advantage
and market share. GT Business Plans is the sister site of GT Venture Capital
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