What Startups Should Know About Lender Warrants

Venture debt can be a powerful resource for early stage companies, allowing them to access significant capital without the dilution of ownership that comes with equity financings. However, venture debt deals do often include an equity component: the lender will often receive a warrant to purchase stock of the borrower, so as to get some upside in addition to receiving interest payments on the loan itself.

The term sheet for the venture debt transaction may only spend a sentence or two describing the warrant, and the warrant is typically a much shorter and simpler document than the loan agreement. However, certain terms in a lender warrant can have unexpected consequences for the borrower. Here are some issues that borrowers should be aware of in lender warrants: