Warrant Coverage

Definition

Warrant coverage is a financial term that refers to the percentage of additional shares an investor may acquire, at a predetermined price, as a result of owning warrants. Warrants are financial instruments issued by a company that give the holder the right, but not the obligation, to buy a fixed number of shares at a specific price before the warrant’s expiration date. The warrant coverage ratio is calculated by dividing the number of warrants by the number of shares the investor initially purchased, indicating the potential increase in share ownership due to exercising the warrants.

Phonetic

The phonetic pronunciation of “Warrant Coverage” is:/ˈwɒrənt ˈkʌvərɪdʒ/

Key Takeaways

1. Warrant Coverage serves as an incentive for investors: Warrant coverage allows investors to purchase more shares in a company’s stock, usually at a predetermined price. This is an attractive option for potential investors, as it can amplify returns and provide additional value.
2. Warrants impact dilution and share ownership: Issuing warrants can result in dilution of the existing shares in the company, as more shares are made available for purchase. However, this dilution can be offset by the additional capital that the company receives through the exercise of the warrants.
3. Warrant provisions can vary: Warrants can have different terms, such as exercise price, expiration date, and other features. Companies should carefully consider the structure and terms of warrant coverage when using it as a financing tool, to optimize benefits for both the company and the investors.

Importance

Warrant coverage is an important business/finance term as it represents the ratio of warrants issued by a company in relation to the number of shares sold during a financing transaction. This measure is significant because it serves as an incentive for investors and provides a potential for future returns, considering that a higher warrant coverage signifies a greater ability to acquire additional shares at a pre-determined price. Essentially, warrant coverage showcases a company’s confidence in its growth and ability to generate value, making it an essential piece of information for investors when evaluating potential investments and risks associated with a particular company or financing round.

Explanation

Warrant coverage is an essential aspect of the financing process, primarily used to offer long-term value, protection and potential returns to early-stage investors. Primarily associated with private companies raising capital through equity financing, warrant coverage serves as an incentive to encourage and attract investors to support a company’s growth and expansion efforts. It does this by providing investors with the opportunity to secure not just the primary securities but also additional shares of the company at a predetermined price within a specific period of time. This ensures that the investors’ commitment is rewarded and safeguards their interests against potential risks associated with dilution of ownership, stock price fluctuations, or reduced controlling power. The purpose of warrant coverage is twofold. Firstly, it helps the company raise the required capital by providing investors with a more appealing investment package, thus ensuring the company’s financial needs are met. This, in turn, enables the company to direct its resources towards achieving its business objectives and growing its market share. Secondly, the company can capitalize on future potential stock price appreciation with less immediate dilution, by holding back a portion of shares for companies providing the warrant coverage. This delayed dilution works in favor of both the company and the investors as it allows the company to grow without giving up as much ownership, while the investors profit from their warrants being exercised in the future at a higher stock price. Overall, warrant coverage serves as a vital financial instrument that facilitates a mutually beneficial relationship between the company and its investors.

Examples

Warrant coverage is a term used in finance that refers to the number of warrants issued by a company relative to the number of the company’s securities sold as part of a financing transaction, such as a stock or bond offering. Warrants are financial instruments that provide the holder the right, but not the obligation, to purchase a security at a specific price within a specific period. Here are three real-world examples of warrant coverage: 1. Tesla, Inc. (TSLA): In February 2020, Tesla issued $2 billion worth of common stock in a public offering to fund its growth and expansion plans. As part of the offering, Tesla provided certain institutional investors with warrants to purchase additional shares. These warrants provided investors with additional potential upside, offering them the right to purchase more Tesla shares at a pre-determined price. This helped Tesla attract more investment while minimizing dilution for existing shareholders in the short term. 2. Virgin Galactic Holdings, Inc. (SPCE): In October 2019, Virgin Galactic, the space tourism company, completed a merger with the publicly traded shell company, Social Capital Hedosophia Holdings Corp. As part of the merger, Virgin Galactic issued warrants to purchase shares of its common stock to Social Capital Hedosophia stockholders. Warrant coverage acted as an incentive for these stockholders to support the merger as it provided them with the potential to increase their investment returns if Virgin Galactic’s share prices rise. 3. Blue Apron Holdings, Inc. (APRN): In June 2017, meal-kit delivery service Blue Apron went public with an initial public offering (IPO) of common stock. The IPO also included a series of warrants for investors to purchase additional shares in the future. These warrants were intended to incentivize investors to participate in the IPO and invest in the company’s growth. By offering warrant coverage, Blue Apron hoped to attract institutional investors who would provide the company with the necessary capital to fund its ongoing operations, grow its customer base, and scale up its business.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Exercise Price
• Warrant Expiration Date
• Dilution Protection
• Equity Warrants
• Warrant Premium

Sources for More Information

• Investopedia
• The Business Professor
• Flow Capital
• Smart Capital Mind