Reservation of warrant shares: Overview, definition, and example
What is reservation of warrant shares?
Reservation of warrant shares refers to a company setting aside a specific number of shares to be issued when warrants are exercised. A warrant gives the holder the right—but not the obligation—to buy shares at a predetermined price in the future. To ensure that the shares will be available when the warrants are exercised, companies often include a clause reserving those shares in their corporate agreements.
Why is reservation of warrant shares important?
Without a clear reservation of warrant shares, a company may not have enough shares available when warrant holders choose to exercise their rights. This can create legal and financial complications, including dilution issues or breaches of agreements with investors.
For example, if an investor holds warrants allowing them to buy 10,000 shares, but the company has already issued all its authorized shares, the investor may not be able to exercise their warrants as intended. By reserving shares in advance, the company ensures it can fulfill its obligations without complications.
Understanding reservation of warrant shares through an example
Imagine your startup issues warrants to early investors as an incentive for funding. Each warrant allows the investor to buy shares at a fixed price within five years. If you don’t reserve enough shares, you might face problems when investors try to exercise their warrants—potentially forcing you to issue new shares and dilute existing shareholders.
To prevent this, your company board approves a resolution reserving 500,000 shares for warrant holders. This ensures that when investors want to convert their warrants into shares, the shares are readily available without affecting other shareholders.
An example of a reservation of warrant shares clause
Here’s how a reservation of warrant shares clause might appear in an agreement:
“The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock a sufficient number of shares to permit the exercise of all outstanding warrants. The Company shall take all necessary corporate action to ensure that such shares are duly authorized, validly issued, fully paid, and non-assessable upon issuance.”
This clause ensures that the company will maintain enough authorized shares to meet its obligations when warrants are exercised.
Conclusion
Reservation of warrant shares is a crucial part of corporate financing and investment agreements. It ensures that warrant holders can exercise their rights without issue and protects companies from legal and financial complications.
For SMBs issuing warrants to investors, employees, or partners, properly reserving shares helps maintain trust, avoid disputes, and ensure compliance with agreements. If your business offers warrants, make sure your contracts clearly state how and when shares will be reserved to prevent future complications.
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.