Warrants can give your business a valuable financial advantage. This article takes an in-depth look at the variations, pros, and cons of warrants. Find out if warrants are a good fit for your business.
What Are Warrants and How Are They Used?
As your company gains momentum and earns a significant profit, you can potentially grow your company even more by offering stocks. Stocks and investing can be much different than owning and running a company, as many companies and businesses choose to not pursue stocks. However, while it might be difficult and confusing at first, stocks may be an excellent choice in the long run, as you can find many investors willing to put money and time into your business to help it expand. It can be overwhelming to understand all the new terms, especially if you weren’t educated in business. We’re here to help answer your questions and guide you through the process. Let’s walk through it together.
Warrants are a contract that investors or employees can use to buy or sell stocks before a certain expiration date. These possible investors and sellers buy or sell these warrants at a set price, and after that expiration date, that price can change drastically depending on the company.
Variations of Warrants
There are also different variations of warrants and differences between call warrants and put warrants. Forbes magazine describes the difference between the two. Call warrants are the most common version of warrants, which follows the most common definition of warrants in general. Call warrants let investors buy stocks at a specific price, before the expiration date of that warrant. Put warrants are the opposite of call warrants. While the investor is under no obligation to sell their stocks, if they decide to sell they have the option to sell at the price they were during the expiration date they originally bought them at.
The many variations of warrants can be confusing and can sound very similar at a first glance, however, they have many discrepancies.
Difference Between Warrants and Options
The difference between Stock Warrants and Stock Options is right in the names. Stock warrants are more rigid, in which the investors are given a set price and a set date to buy the company’s stock. Warrants often work directly with the company and investor. Stock options are less rigid. Companies will give a set price, and the investors are under no obligation to buy the option.
Pros of Warrants
There are many reasons why warrants can benefit you and your company. Here are a few of the main reasons businesses issue warrants, and how it helps them.
- Attracts Employees and Investors: Warrants can be used as a part of a benefits package for your employees. Your employees will appreciate the consideration. Keeping stocks within the company as opposed to selling them to outsiders can increase your company’s integrity. Because these employees are hired by you and your company, you have actively chosen them, so there’s a higher chance they will represent your company’s values if they decide to invest in you.
- Increases Revenue: Warrants can be an easy way to increase your company’s capital. Warrants earn a little bit more money than just selling stocks alone, as you are selling the warrant itself, and the stock once it’s been exercised. This makes it more appealing to sell warrants, depending on what your stocks are valued as. This extra cash flow can make it easier for your company to expand, and possibly invest on its own.
- Encourages Purchasing Stock: If you have an investor who’s reluctant to buy stock whether it be because of the price, company, or any other reason, you can potentially encourage them into buying your stock with a warrant. Often, warrants make buying stock more appealing to investors, as it gives them an option to sell their share later down the road. They can potentially earn even more money if your business grows, and your stock prices increase.
- Longer Time Frame: When warrants have a specific expiration date set in stone, investors can use this timeframe to their advantage. Depending on how a business is growing, investors may make the financial decision to sell. These larger windows of time are appealing to investors. It can make these decisions easier and provides more time to think things through. This also works in your favor, as you can better engage with your investors if you have more time to get to know what they expect out of your company.
Cons of Warrants
- Increased Risk: Warrants are not as stable and viable as most stock contracts. It can sometimes be risky to sell out warrants.
- Disadvantage: While warrants are appealing to sell stocks with, some disadvantages come with selling warrants specifically. Because an investor buys a warrant, they don’t have as much say in company decisions as a regular shareholder would under normal circumstances.
- Lack of Availability: Warrants are widely unavailable compared to normal stocks, most companies that sell them are speculative companies, so investors may be hesitant to buy them in the first place.
Should Your Company Issue Warrants?
Many companies are unsure if it’s worth their time and resources to issue warrants to potential buyers. The entire process can be intimidating and nerve-wracking, but at the end of the day, there’s no right or wrong answer when it comes to warrants. The idea is that warrants are issued to benefit your company, instead of losing potential capital. Experts at Intrepid Finance know the ins and outs of business growth. We’re here to help make the process easy, and stress-free.