Warrants and Stock Options

A warrant is similar to a stock option but is not exactly the same. Warrants are derivative contracts that primarily give the owner the right, but not the obligation to buy stock in a corporation at a defined price and within a defined period of time. Warrants are issued by the company itself as opposed to a third party. Unlike options, the issuance of warrants dilutes equity. The exercise of options applies to already issued stock, so it is not dilutive.

Warrants are sometimes issued in connection with the sale of a corporation. Sometimes the seller of a business will be issued warrants as part of the negotiation of the sales price of a corporation. This provides the seller the ability to exercise the warrants, thus providing the seller with additional value if the acquiring company is successful.

Stock options, also known as equity options, provide an investor the right, but not the obligation, to buy stock at an agreed upon price and date. Stock options are often given to key employees and as partial consideration when a business is acquired. Stock options are a form of derivative.

Derivatives are contracts between two or more parties, that derive their value from an underlying asset, group of assets, or business entity.

Warrants and stock options may be tied to a vesting schedule. A vesting schedule determines when and under what conditions warrants and/or stock options become fully owned by the person receiving them.


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