Post-IPO warrants: Overview, definition, and example
What are post-IPO warrants?
Post-IPO warrants are financial instruments that are issued after a company has completed its Initial Public Offering (IPO). These warrants give the holder the right, but not the obligation, to purchase shares of the company’s stock at a predetermined price (called the exercise price) within a specific time frame. Post-IPO warrants are often used as a way to raise additional capital for the company after the IPO, or as part of compensation packages for employees, investors, or other stakeholders.
For example, after a company goes public and its shares are traded on the stock market, it may issue post-IPO warrants to investors or employees, allowing them to buy more shares at a set price in the future, even if the market price of the shares rises.
Why are post-IPO warrants important?
Post-IPO warrants are important because they allow companies to attract investment or reward stakeholders with the potential for future profits without immediately diluting the value of the company’s stock. These warrants can also be used as an incentive for employees or investors to remain committed to the company, especially if the company’s stock price increases after the IPO. For the company, post-IPO warrants are a way to raise additional capital in the future if the warrants are exercised.
For investors, post-IPO warrants offer the potential to purchase shares at a fixed price, which could be advantageous if the company's stock price increases. For businesses, issuing post-IPO warrants helps provide capital and maintain interest from stakeholders after the IPO is completed.
Understanding post-IPO warrants through an example
Let’s say a tech company has completed its IPO and is now a publicly traded entity. As part of a deal to attract investment, the company issues post-IPO warrants to certain investors, giving them the right to purchase additional shares at $10 per share for the next five years. If the company’s stock price rises to $20 per share over the next year, the investors holding these warrants can exercise them and purchase shares at the lower price of $10, potentially profiting from the price difference.
In another example, a company issues post-IPO warrants as part of an employee compensation package. The employees are granted the right to purchase shares at $15 each, even though the current market price is $18. If the company performs well and its stock price increases, the employees can exercise their warrants and purchase shares at the lower exercise price, benefiting from the increase in value.
An example of a post-IPO warrant clause
Here’s how a post-IPO warrant clause might appear in a contract:
“The Company hereby grants the Investor a post-IPO warrant to purchase up to [number] shares of Common Stock at an exercise price of $[exercise price] per share, exercisable for a period of [X] years from the date of the Company’s IPO.”
Conclusion
Post-IPO warrants are a way for companies to issue financial instruments after their IPO, giving stakeholders the option to buy shares at a set price in the future. These warrants can provide investors, employees, or other stakeholders with an opportunity to benefit from future stock price increases, while also giving the company a way to raise additional capital or reward key participants. For businesses, post-IPO warrants are a useful tool to attract investment, retain talent, and ensure ongoing interest in the company’s success.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.