Understanding Warrants and Their Benefits — and Risks
As you focus on building your SaaS business, you’ll likely consider a variety of sources for growth capital. From venture debt financing and equity-based funding to bank loans and other funding avenues, there are ample opportunities for your business to get the capital it needs to achieve its growth goals. For venture debt companies in particular, you’ll come across a common financial mechanism — warrants — that are advantageous to SaaS companies but can come with some key considerations to determine if they’re the right fit for you.
We’ve explored warrants in-depth before, but interest in them is growing along with the increasing demand for SaaS solutions. This year, companies have expanded their tech budgets, and the demand for tailored SaaS solutions for a variety of key industries isn’t slowing down soon. Now’s the time to position yourself for growth, and growing requires the right funding.
For SaaS company leaders who might be exploring venture debt financing to accelerate marketing and sales efforts, it’s important to understand the key terms of warrants (which are also called equity kickers). This will help you decide whether you want to consider them as part of your bargaining strategy with your selected investor.
Want to speak with a member of our investment team about warrants? We’re here to help. Get in touch now.
4 Venture Debt Warrant Terms to Know When Exploring Venture Debt
Coverage
Venture debt warrant coverage is the number of shares the lender or investor receives through the warrant. It’s important to understand that this is expressed as a percent of the loan amount the lender is providing as opposed to the value of the company. If you applied for a $2 million loan, and you negotiated a warrant with five percent coverage, then the coverage would be $100,000. This figure is then used to determine how many shares that equates to and the price at which the lender can purchase them should they choose to exercise the warrant.
An important note — it is a choice, not a guarantee. Your lender may choose to exercise the warrant within a given time period, or they may opt not. Regardless, the terms defined within your agreement, like the coverage or expiration date, ensure you remain informed and prepared at every point.
Security
The security is the class of stock your warrant gives the lender the right to purchase. Examples include common stock, preferred stock, and so on. There are no restrictions on the class of stock provided in the warrant. The terms of the class of stock offered will also be the same if the lender were to exercise the warrant. But importantly and unlike other forms of stock, warrants don’t have liquidation preferences.
Strike Price
In a venture debt warrant, the strike price is the price per share. This is negotiable with the lender. The strike price can be set above your current value, at current value, below current value, or — and this is common — at a discount to future valuation. Strategically, lenders try to set strike prices lower because this enables them to purchase valuable stock for less when they exercise the warrant, providing them with a greater payout. Even if the company is being liquidated and the stock value is low, it’s likely that they’d get more back from a lower strike price. This could be viewed as an insurance policy against possible failure.
Expiration
Venture debt warrants feature an expiration date of anywhere from five to 10 years. This feature of the warrant is negotiable, and when the date comes around, your lender will have to make a decision on whether they want to exercise the warrant or let it expire. If your SaaS company is struggling or there are other complications, the lender may choose to exercise to recoup a portion of their investment (and send you a message in doing so). If you’re growing, they may want to exercise the warrant to take an ownership position in the business.
The expiration date also gives you as the borrower extra security because you know that there’s a limited time the lender must enact it, and that can support your planning when it comes to how you manage your equity dilution and future borrowing terms.
Why We Offer Deals With and Without Venture Debt Warrants
At River SaaS Capital, our financial philosophy is based on freedom and flexibility. We know that each SaaS organization we work with has unique needs and interests, and we tailor our financial solutions to best suit your organization. We offer debt options with and without warrants, shaped by where your organization is at and how we determine we can best help you grow. We also offer the option for a convertible note, which allows you to convert debt to equity down the line.
In addition to our warrant and warrant-free financing, we structure repayment plans based on what best serves your business. This includes traditional installment options where you can take out funds in a lump sum or tranches, then repay both principal and interest, as well as interest-only and step-up structures that start with smaller payments so you can dedicate more earnings back into your business to accelerate your growth. No matter your priorities, you can count on our team to help you discover the best financing option to fuel your growth now and in the future.
Our investment team believes in true partnership. We’re here to guide you on your growth journey and support you, but it’s up to you to call the shots on what financing mechanism is right for you. Our team will always be available to answer questions and provide advice and input. When you’re free to achieve what you set out to achieve, we both win.
Talk to Our Team Today
If you’re ready to work with a company that values your leadership and drive for your SaaS business, we’re here to help. We’ve helped a number of SaaS companies achieve their growth goals, and we’d enjoy the opportunity to learn more about you and your objectives.
Ready to talk? Contact our investment team to start your growth journey.
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