A warrant is a financial instrument that gives the holder the right—but not the obligation—to purchase equity (typically Preferred or Common shares) in a company at a predetermined price, known as the strike price, for a set period of time.
Key Terms of the Warrant
Here’s how it works:
- Strike Price: This is the fixed price at which the holder can buy shares in the acquiring company in the future. The strike price is typically based on the valuation of the acquiring company at the time of the deal.
- Term / Expiration Date: The warrant is valid for a fixed period—often 5 to 10 years. The holder may choose to exercise the warrant any time before expiration if the underlying shares are worth more than the strike price.
- Vesting (if applicable): Some warrants may have a vesting schedule.
- Liquidity & Exit: Warrants themselves are generally illiquid and not tradable. However, if the acquiring company goes public, is acquired, or offers liquidity, the holder may have an opportunity to exercise the warrant and realize returns.
Why Use Warrants?
Warrants are often used in M&A transactions or recapitalizations when:
- The acquirer wants to defer dilution or conserve cash
- Investors are being given a way to participate in future upside instead of receiving immediate proceeds
- There's a desire to align incentives with the long-term success of the company
What Would This Mean in the Fund’s Context?
- The Cashmere Fund would hold the right to acquire shares in the acquirer at a specific price.
- The Cashmere Fund would not be required to exercise the warrant, and would not need to invest any additional capital unless it chooses to.
- If the acquirer grows in value, The Cashmere Fund could realize a meaningful return by exercising the warrant and potentially selling the resulting equity.
- If the company does not appreciate or becomes illiquid, the warrant may expire worthless.
Still have questions?
We’re happy to help. Just reach out to cashmere@sweaterfunds.com and we’ll walk you through it.