“Can you explain what ‘warrants’ are?”

Question: Can you explain warrants that are issued and what rights does an employee have regarding them?

Also, can you direct me to a place where I can find out more about understanding them?

Oakland, California

Answer: Dear Regina:    

A “warrant” is a kind of financial instrument that entitles its holder to buy the underlying stock of a company at a fixed exercise price until a specified expiration date.

It is a “cousin” to a “stock option,” a financial instrument that more people are familiar with, but there are certain differences. They are both a kind of “contractual promise,” but warrants are a kind of “contract” issued and guaranteed by a company relative to its own stock, while “options” can be created by any person who promises to buy or sell stock at a certain price for a certain time period.

To borrow money, a company will often issue bonds or preferred stock, both of which require the company to pay interest to the holders. To “sweeten” the deal, and hopefully to lower the rate of interest the company has to pay to borrow the money, the company may issue warrants to those who buy their bonds or preferred stock.

In my experience, it is not too common for a company to issue warrants to its employees, except for instances when a company has filed to become a publicly-owned company, in a process called an Initial Public Offering, or “IPO.”  

Wikipedia has a good discussion of the fundamentals of warrants – including different types, their trading and their pricing – for the average person. 

Best to you,
Al Sklover

© 2011 Alan L. Sklover, All Rights Reserved.

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