Warrants and Growth Capital Deals
As SaaS companies set up their growth strategies, it’s critical to consider the types of funding that are available and best suited for your needs. Venture debt, a favorable choice that’s risen in popularity as equity deals have slowed over the past few years, is offered with and without warrants. Warrants are simply an agreement that gives lenders the right to buy stock at a fixed price for a set period of time. Read on to explore what debt warrants are and how they might impact you as a borrower.
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What Are Venture Debt Warrants?
A warrant (also called an equity kicker) is a security that grants a lender the right to buy stock in a company for a fixed price until a preset expiration date. Warrants are typically provided as an incentive to investors in exchange for their investment; however, depending on the lender, they may also be a loan condition required as part of a venture debt agreement. Regardless of how they come about, they must be issued by the borrower if used.
Warrants are expressed in the form of coverage — a percentage of the lender’s investment in your business usually in the range of five to 10 percent. On a $500,000 loan, you may be required to provide warrant coverage of 10 percent. This means you would provide the lender with a warrant that gives them the right to purchase $50,000 of your company’s stock.
A warrant is a low-risk solution for accessing working capital, especially when you compare it with the upfront equity requirement of VC and its implications. For many SaaS companies, they can be an advantageous addition to a venture debt deal that shapes your access to funding and the relationship you build with your lender.
How Warrants Can Impact Your Growth
Every lender is different, and some require warrants for every deal. At River SaaS Capital, we offer venture debt financing with and without warrants based on the unique details related to our individual engagements. This provides enhanced flexibility and ensures we’re fully aligned with the SaaS organizations we fund to ensure a successful foundation. There are a few factors that must be fully taken into consideration regarding warrants before finalizing the deal.
Warrants Reduce the Risk for Investors — and Benefit Start-Ups
Start-ups and early-stage SaaS companies know the challenges of finding financing all too well. Without a long growth history or proven successes to showcase, it can be difficult to secure the funds you need from a bank that’s wary to invest in you. The private equity space has also seen significant declines in deal activity, contributing to a hypercompetitive environment with a playing field where early-stage startups struggle to come out on top.
Venture debt is a popular and proven alternative to consider, but lenders take on risk when investing in companies at this stage. A warrant helps alleviate some of this risk and can help start-ups secure a deal. This helps your organization access fast, flexible financing you can use to spark powerful growth and ensures your lender is more aligned to help you achieve mutual success. With a venture debt deal and warrants, you can set a foundation for success and jumpstart your growth without waiting to score an equity deal.
Debt Warrants Are Established With Clear Terms Up-Front
When you enter a venture debt agreement with a warrant, there’s no guarantee that the warrant will ever be used. Your lender may not choose to pursue shares within your organization, and they can only do so for a set amount of time. Often, a lender has five to seven years to choose to pursue equity shares, so they can’t wait until two decades later to take advantage of the warrant. This keeps it fair and transparent between lender and borrower and ensures you know the end date for when the warrant must be issued.
Your lender also must purchase only a set number of shares, as determined up-front. This means that if your stock significantly increases in value, they’re not entitled to purchase a significant portion at their promised reduced price — they can only purchase what was outlined in your agreement, often a value determined by the original loan amount. That way, your lender must stick to what you outlined and at every point, you know how many shares you may have to divvy if your lender chooses to issue the warrant.
One key caveat — in addition to the time period and number of shares being predetermined, so is the cost. This means that even if your stock increases significantly in value, your lender is still only able to purchase the stock at the fixed price set by your agreement. If the investor decides to exercise the warrant within the time period, they will own a portion of your company. If you already have VC investment, some lenders may use warrants to gain rights to invest in your future equity round on the same terms, conditions, and pricing offered to investors at that time.
Warrants Can Set the Stage for Long-Term Investments
Warrants offer both immediate and long-term advantages to SaaS borrowers when they’re issued. Though your equity will be diluted as the shares are granted to the lender, you will still benefit from the immediate cash flow this provides. Your lender will still be obligated to purchase the number of shares they desire within the terms of your agreement, so this can bump up the resources your business has at any point.
Additionally, it opens the foundation for long-term relationships and investments. Some lenders, like River SaaS Capital, offer multiple forms of financing, including debt, equity, and hybrid structures. When your lender is invested in your business with both debt and equity, you can feel confident that their support will grow and evolve with your needs. A lender with a warrant is invested in your growth and success, and their ability to provide both initial debt financing and ongoing support through the purchase of stocks or the continuation of your relationship will help set you up with a trusted financing mechanism to serve your needs for years to come.
When you work with our team, you can appreciate enhanced flexibility and opportunities, including tailored financing options, growth insights, and more. A warrant within our deals is just another component of our support and flexibility.
Talk to Our Team Today for Financing With and Without Debt Warrants
At River SaaS Capital, we’re proud to support some of the brightest minds in SaaS with strategic financing designed to support scaling at every stage. Our venture debt is offered both with and without warrants and available in unique formats so you can tailor it to your needs and enjoy the repayment structure that works best for you, from traditional loans to interest-only and step-up options. We also offer hybrid financing options that combine the power of debt and equity to support your needs as they evolve and allow you to keep one reliable partner for more comprehensive financing options.
If you’d like to learn more about our approach or overall investment philosophy, our team is ready to help. Connect with us today.
