How Do Warrants Work in Venture Capital?

how do warrants work in venture capital

The answer can play a big role in the growth journey of your SaaS business, so it’s important to understand the ins and outs of financial warrants in venture capital deals to make the most informed decisions. 

Warrants can incentivize investors by offering them the right to purchase stock of the company at a fixed price, no matter how much the price of the stock has increased. While this may sound like an easy way to spark investor interest and secure a deal, its downsides can result in exit plan complications and difficulty managing your equity dilution. Learn more about the role of warrants in venture capital, what more strategic alternatives exist, and how you can set up for long-term scaling from the start. 

How Do Warrants Work in Venture Capital — and Who Do They Help?

A warrant is an agreement between a company and an investor that the investor may purchase stock in the company at a fixed price at any time before the warrant’s expiration. For debt warrants, investors can often purchase 5 to 10 percent of the value of their investment expressed as a percentage of coverage. These agreements are a strong incentive for investors because if the company they’ve invested in takes off, they can secure shares of the company for a reduced price. This maximizes the value of their investment, and their gains can be significant depending on the growth of the companies they’ve invested in. 

For the companies themselves, the benefits are countered with looming downsides. While offering a warrant can sometimes be crucial for securing a deal — and in turn, the funding needed to grow — it is designed to serve the investors more than growing SaaS companies. If your company begins to scale, no matter how high the price of your stock increases, your previous investors will still reserve the right to purchase shares at a reduced rate. This can cost you money that you would’ve earned without a warrant, and can also reduce your ownership control.

Maintaining ownership control is a top consideration for many SaaS companies, especially those within their growth stage. The more you can maximize your ownership control in the beginning, the more power and flexibility you have down the line as you scale. Its non-dilutive nature is a key reason why venture debt is such a strategic option, and this differentiator is canceled out when the exchange of equity is involved. An exercised warrant will also dilute existing stock in your company. A warrant requires new stock when exercised, so all existing shares are lowered in value as a result. Because of this phenomenon, warrants can also complicate exit plans and add unnecessary risks. 

Warrants are designed to protect the interest of your investor, not your company. Consider more strategic alternatives that set you up with a strong foundation for scaling without sacrificing your shares to obtain it.

Non-Dilutive Venture Debt: Get Financing, Keep Your Shares

While some companies may find warrants to be worth the benefits they get in return, others may not feel it’s right for their journeys. If you want to pursue funding without warrants attached, consider working with a non-dilutive debt funding provider.

Venture debt from the right financing partner will ensure you’re equipped with the financing you need to grow without requiring you to give up your shares to get it — now or later. It’s flexible and swift to obtain, allowing you to put it into action even faster. It’s also tailored to support your growth as you scale, setting you up for success at every stage. Unlike alternatives like private equity or bank investments, venture debt is more accessible to earlier-stage companies ready to power up with the right support. It can be ideal for SaaS businesses that don’t yet meet certain thresholds to obtain bank loans or equity deals, but its benefits stretch far beyond the initial growth phase. 

Not only does it offer a slew of advantages over equity financing alone, but it also serves to complement equity financing if you pursue it down the line as you scale. Venture debt keeps your equity dilution under your control and allows you to extend your runway between raise rounds. When you put it into action now, you can scale before the next raise round and approach it from a more strategic position. This allows you to be more competitive if you want to open up the possibility of equity deals later — and ensures that when investors are getting any of your shares, they’re paying a fair price based on your growth, not a reduced warrant price.

Choose venture debt from non-dilutive funding providers like River SaaS to level up your growth and better control your ownership dilution. 

Choose River SaaS Capital for Better Venture Debt, Always Warrant-Free

At River SaaS, we believe in supporting the growth of our clients with no-strings-attached funding that you can rely on to support your scaling at every stage. That’s why we never include warrants in our deals. If you want to protect your equity shares without losing out on the funding you need to expand, you can trust our team to deliver fast and flexible funding without the ability to purchase shares at a reduced cost later. 

We’ve supported some of the brightest SaaS minds from a wide range of industries, including cybersecurity, logistics, healthcare, and more. With every new client, we form supportive relationships to understand your needs and offer strategic growth insights to help you scale. We also tailor our financing structures to best match your goals, with traditional loan options, interest-only structures, and more.

In addition to growth insight, we do offer a hybrid financing structure that allows you to obtain equity down the line if you’re interested in pursuing equity financing without worrying about warrants. Our team is committed to helping you grow your business your way, and we’re here to help at every stage. 

Contact our investment experts to learn more about our warrant-free, reliable financing today.