What is a warrant?
A warrant (Teckningsoption in Swedish) acts much like a call option. It provides a promise that you can buy shares in the future at a price agreed upon today. The key difference is that *when a warrant is exercised, the company issues (creates) completely new shares*.
The value of a warrant rises if the company's underlying share price exceeds the predetermined subscription price (strike price).
Why are warrants used?
- Incentive programs — By far the most common use case. They are given to key personnel and employees as incentives. They get upside potential if they help the company's value grow, without needing to invest heavily upfront.
- Capital raising (Units) — Sometimes warrants are attached as a free "sweetener" to investors in a new share issue. A package of shares and warrants is often called a *Unit*.
- Future capital injection — For the company, the exercising of warrants means an automatic infusion of capital in the future (when the maturity date occurs).
Dilution
When warrants are exercised, it affects the cap table through dilution for existing shareholders, because the total number of shares in the company increases. For this reason, valuations or ownership stakes are often discussed on a *fully diluted basis*, meaning we pretend that all outstanding warrants have already been converted into shares.