What Is a Warrant?
A warrant is a contractual right (not an obligation) to buy a defined number of shares at a defined strike price, before a defined expiry date. It is structurally identical to a long-dated stock option, but issued to a lender or strategic investor instead of an employee.
In venture financing, warrants appear in two main contexts: venture debt facilities (the lender gets warrants in exchange for accepting equity-like risk on debt-like returns) and bridge or convertible rounds (the bridge investor gets warrants as a sweetener for taking interim risk).
Warrant terms are standardised in most markets: 10-year expiry, strike price equal to the most recent priced round's price per share, cashless exercise allowed, and 'coverage' defined as a percentage of the loan principal divided by the strike price.
How Coverage Math Works
Coverage is expressed as a percentage — '15% warrant coverage' means warrants for shares worth 15% of the loan principal at the strike price.
Formula: number of warrant shares = (loan principal × coverage %) / strike price.
Example: €1M venture debt facility, 15% coverage, €10 strike price → warrants for (€1M × 15%) / €10 = 15,000 shares.
If the company exits at €30/share, the warrant holder exercises (pays €150K to acquire 15,000 shares worth €450K), netting €300K. If the company exits at €5/share, the warrant is worthless and expires unexercised. The asymmetry is what makes warrants worth giving to lenders: they reduce the lender's required interest rate without forcing the company to pay equity upside it cannot afford.
Where Warrants Sit on the Cap Table
Warrants are tracked on the fully diluted cap table as a line item separate from issued shares — they represent potential shares that will only exist if and when exercised. They count toward fully diluted capitalisation for purposes of price-per-share calculations, anti-dilution math, and pro-rata rights.
The line item shows: holder name, instrument type (warrant), number of underlying shares, strike price, issue date, expiry date, vesting status (usually fully vested at issue), and exercise status (outstanding vs. exercised vs. expired). See [fully diluted capitalization](/captable/fully-diluted-capitalization) for the broader cap table view.
Investors in the next round will model the warrant exercise impact on their own ownership. A founder who has issued 0.5% in warrants will see prospective Series B investors subtract that 0.5% from their pre-money valuation calculation. The warrant is therefore not 'free' — it has a real cost in the next round's pricing.
When Warrants Are a Reasonable Trade-Off
Venture debt with warrants is usually a better deal than the equity it replaces. A €2M priced equity round at €10M pre-money costs the founder 16.7% of the company. A €2M venture debt facility with 15% warrant coverage costs the founder ~0.5% (warrants) plus 11% interest over the debt term. Even at 11% interest for 3 years (€660K total), the founder retains 16% more of the company at exit.
The trade-off only works if the company can service the debt. Venture debt typically requires interest-only payments for 6–12 months followed by principal amortisation over 24–36 months. A startup with unstable revenue cannot meet that schedule and should not take venture debt regardless of how cheap the warrant coverage looks.
The other use case is a bridge round between priced equity rounds. A €500K bridge with warrants at the last round's price avoids resetting the valuation while still giving the bridge investor upside. This is preferable to a SAFE or convertible note that would re-price the bridge at a discount to the next round. See [convertible notes and SAFEs](/captable/convertible-notes-safes) for the alternatives.
Comparison to Convertible Notes
Warrants and convertibles both give the holder equity upside without a current priced round, but they work differently.
A convertible note is a loan that automatically converts to equity at the next priced round, typically at a discount (15–25%) or valuation cap. The principal is wiped out at conversion. The holder ends up with shares, not cash + warrants.
A warrant is a right to buy shares, not a debt instrument that becomes shares. The principal of the underlying loan is paid back in cash; the warrant is separate equity upside on top.
Use a convertible note when the bridge capital is genuinely intended to convert to equity (i.e. no intent to repay in cash). Use venture debt with warrants when the capital is intended to be repaid and the warrant is a sweetener for the equity-like risk the lender is taking. See [secondary transactions](/captable/secondary-transactions) for related instruments.
How CAPLINK Tracks Warrants
CAPLINK's cap table module treats warrants as a first-class instrument type with full term tracking: strike price, expiry, coverage %, anti-dilution treatment, and exercise history. The fully diluted view includes outstanding warrants, with toggle filters for 'exercised only' vs. 'fully diluted including warrants'.
When you model an exit, the waterfall analyzer computes warrant exercise decisions automatically — exercising if exit price > strike, expiring if exit price < strike. The same logic applies to anti-dilution adjustments: if a future round re-prices below the warrant strike, the warrant holder may or may not be entitled to a strike-price reset depending on the original terms, and CAPLINK surfaces both interpretations.
Read [convertible notes and SAFEs](/captable/convertible-notes-safes) for the related instrument comparison, [fully diluted capitalization](/captable/fully-diluted-capitalization) for the broader cap table view, and [equity dilution](/captable/equity-dilution) for the longitudinal view of how warrant exercise affects founder ownership.