Warrants in bridge debt financing transactions

July 9, 2014

Tax stock calculation sheetClients may be interested in issuing warrants or options to purchase additional company securities as part of their debt financing transactions.  The terms of the warrant are described in a separate document, including the type of security issuable upon exercise of the warrant, the number of units of the covered security issuable upon full exercise of the warrant, the exercise price, the term of the warrant, rules for adjusting the number of units covered by the warrant and the exercise price, and procedures for exercising the warrant and issuing the new securities to the investor.

A common use of a warrant is in connection with a bridge financing arrangement (§ 73:14) in anticipation of the closing of another round of equity funding. In this situation, investors providing a bridge loan will be issued warrants to purchase additional shares of the securities issued in the equity transaction. See Specialty Form at § 73:271.  While a bridge financing may, and often does, involve a single investor/lender, companies may obtain funding from two or more investors, all of which would receive identical promissory notes and warrants even though the loans may be made at different times over a mutually agreed window of time (e.g., one to three months).  While preferences among the bridge lenders are uncommon and unwieldy to create, management may reward an investor willing to make the first loan with a warrant to purchase a fixed number of common shares at the then-current fair market value of the common shares that they investor can exercise over a relatively short period of time.  See Specialty Form at § 73:273.50.  If such a warrant is issued the company must disclose the terms to other investors and be prepared to field requests for equal treatment; however, the company can reasonably argue that the warrant were issued in recognition of special risks undertaken by the initial investor in providing funds when it may not have been clear that the company would be able to raise additional financing.

A full discussion of warrants and options, including other examples of form documents, is provided in Corporate Equity Financing (§ 72:22).