Purchase warrant: Overview, definition, and example
What is a purchase warrant?
A purchase warrant is a legal document that gives the holder the right, but not the obligation, to buy a specific amount of a company's stock at a set price within a certain period. Purchase warrants are often issued by companies to raise capital or as part of a deal with investors. Unlike stock options, purchase warrants are typically issued by the company itself, and they may be traded on the market.
For example, a company might issue a purchase warrant as part of a bond offering, allowing the bondholder to buy shares of the company’s stock at a set price for a certain period. If the company’s stock price goes up, the bondholder can exercise the warrant and buy shares at the lower price, potentially making a profit.
Why is a purchase warrant important?
Purchase warrants are important because they provide investors with the potential to buy stock at a favorable price, especially if the company’s stock price increases over time. For businesses, offering purchase warrants can help raise capital and attract investors. It can also serve as an incentive for investors to purchase bonds or other securities.
For businesses issuing warrants, it’s important to understand how they can impact company ownership and shareholder value. When a warrant is exercised, new shares are issued, which can dilute the ownership of existing shareholders.
Understanding purchase warrants through an example
Imagine a company offers bonds to investors, and each bond comes with a purchase warrant that allows the investor to buy 10 shares of stock at $10 per share. If the company’s stock price rises to $20 per share, the investor can exercise the warrant, buy the shares at $10 each, and sell them for $20 each, making a profit. If the stock price doesn’t rise above $10, the investor might choose not to exercise the warrant, and it expires.
In another example, a startup might offer a purchase warrant to an early investor, allowing them to buy shares of the company at a fixed price for the next 5 years. If the company grows and its stock price rises, the investor has the chance to buy at a lower price than the market value.
An example of a purchase warrant clause
Here’s how a purchase warrant clause might look in a contract:
“The holder of this Purchase Warrant shall have the right to purchase [Insert Number] shares of [Company Name] at a price of [Insert Price] per share, at any time before [Insert Expiration Date].”
Conclusion
A purchase warrant gives investors the right to buy a company’s stock at a set price within a certain period. It provides an opportunity to profit if the stock price increases, while also serving as a way for businesses to raise capital. For companies, issuing purchase warrants can attract investment but also may lead to dilution when warrants are exercised. Including clear terms in contracts about purchase warrants helps ensure both parties understand the rights and responsibilities involved.
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.