Warrant

A warrant is a contractual right — but not an obligation — granted by a company to an investor or lender, allowing them to buy a specified number of the company's shares at a predetermined exercise price on or before an expiry date. Unlike an option, which is typically granted under an employee plan, a warrant is issued directly by the company as a standalone instrument and recorded in the company's books accordingly.

Warrants are frequently used as sweeteners attached to debt instruments — venture debt lenders, for example, often receive warrants covering 1–2% of the company's equity as additional compensation for taking startup risk without the equity upside of a VC. They are also common in bridge rounds, where existing investors receive warrants as compensation for bridging capital at a period of uncertainty.

Under the Companies Act, 2013, Indian companies can issue share warrants. The terms — exercise price, number of shares, expiry, and any conditions precedent — are set in the warrant agreement. The exercise price is typically set at or near the fair market value at the time of issuance (or at a fixed discount), and SEBI regulates warrant issuance for listed companies with additional pricing and lock-in rules.

For the company, warrants create contingent dilution — they do not immediately increase the share count, but they will if exercised. Founders and their advisers should account for warrants when modelling the fully diluted cap table, particularly before a fundraising round. If the market price of shares rises well above the exercise price, warrants are said to be in the money and are likely to be exercised; if below, they expire worthless.