| |
Issuing Warrants to Investors
By Dave Lavinsky
When raising capital for a business venture, warrants are a common form of equity that is given to investors. A warrant is like an option - it gives the holder the right to buy a security at a fixed or formulaic price, which is known as the "exercise" or "strike" price.
Warrants are often confused with options. Options, as used in the venture capital space, are typically long term (up to 10 years). They are also typically issued to employees versus investors. Conversely, warrants act like short-term options and, unlike employee options, can be traded as an independent security.
In general, neither the issuance of warrants nor their exercise (at least by non-employees) is a taxable event. In fact, in 1984, Congress reversed the earlier position of the IRS that the expiration of a warrant is a taxable event for the issuer. However, whenever a debt security with warrants attached is issued as a package, original issue discount problems are invited.
One type of warrant that once popular as a financing mechanism for emerging ventures is contingent warrants. These warrants become exercisable if and when the holder does something for the issuer, for example buys a certain level of product. Contingent warrants are no longer used often since the SEC ruled in favor of current and periodic recognition of expense to the issuer.
Like an option, a warrant is considered a "common-stock equivalent" for accounting purposes. And, if the warrant has been "in the money" (i.e., the exercise price is below the market price) for three consecutive months, it is deemed to impact earnings per share under the so-called treasury-stock method. That is, the warrants are considered exercised, new stock is issued at the exercise price, and the proceeds to the issuer are used to buy in stock at the market price.
Warrants are a common financing mechanism and companies seeking venture capital should consider and become knowledgeable about this type of equity device.
About the Author
GT Business Plans has developed over 200 business plans for clients that have collectively raised over $750 million in financing, launched numerous new product and service lines and gained competitive advantage and market share. GT Business Plans is the sister site of GT Venture Capital.
Article Source: http://www.simplysearch4it.com/article/13163.html
| If you wish to add the above article to your website or newsletters then please include the "Article Source: http://www.simplysearch4it.com/article/13163.html" as shown above and make it hyperlinked. |
| Some other articles by Dave Lavinsky | Should Entrepreneurs Hire Entrepreneurs?
In his book, Gerber discusses that an entrepreneur encompasses three roles, which are: the technician, the manager, and the visionary. As a technician, the entrepreneur is ...
Pre-Money vs. Post-Money Valuation
When a company decides that it must raise capital, a key question that must be answered is how much the company is worth. For example, if the business needs $500,000 ...
Answering "Why You, Why Now" - A Critical Component of a Winning Business Plan
Business plans continue to be an essential element of the capital-raising process. They must convince investors to take notice - ...
Finding a Venture Capital Firm
Many ventures are faced with the challenging task of raising venture capital. The first part of this process is finding ...
Describing Intellectual Property in Your Business Plan
Most companies that are worthy of raising venture capital have proprietary Intellectual Property (IP). In fact, the quality of the IP and the management team are often the two most important ...
The Marketing Plan and the Four P's
The Marketing Plan section of the business plan demonstrates how a company will penetrate the market with its products and ...
|
|
| |
|
