What Is Warrant Coverage?

Meow Advisory, LLC

Meow Advisory, LLC

Warrant coverage is an important concept for companies seeking investment, especially high-growth startups looking for venture capital. In essence, warrant coverage gives investors the right to purchase additional shares in a company at a fixed price in the future. This helps protect their investment, while providing additional upside if the company performs well.

For startups and growth companies seeking funding, understanding investor expectations around warrant coverage is key. Though not all investors require warrants, they are common in many funding instruments like convertible notes, SAFEs, and venture debt deals. Negotiating warrant coverage requires balancing investor requests against potential dilution of existing shareholders.

Defining Warrant Coverage

A warrant gives an investor the right, but not the obligation, to purchase company stock at a predetermined price up until an expiration date. The strike price is typically set at or close to the valuation of the company's most recent funding round.

Warrants are normally expressed as a percentage of the investor's capital contribution. For example, an investor putting in $1 million into a startup may request a 10% warrant coverage. This would give them the right to purchase $100,000 of additional shares at the strike price in the future.

The percentage of warrant coverage requested and eventual terms granted can depend on factors like perceived investment risk, company stage, and negotiation leverage on both sides.

Why Investors Want Warrants

Investors request warrant coverage for several key reasons:

  • Downside protection - Warrants give investors the right to purchase more shares at a set price even if subsequent valuations fall. This protects them against dilution in later rounds.
  • Participation in upside - Similarly, if the company grows significantly in value, investors can exercise warrants to lock in more shares at a discount to the current fair market value. This allows them to capture more upside from their investment.
  • Overall returns - Gains from warrants helped boost the returns of successful deals within an investor's overall portfolio. Since startup investing is risky, warrants provide a mechanism to enhance IRR.

In essence, warrant coverage allows investors to maintain their proportional company ownership by participating in future fundraising rounds one way or another.

Why Companies Provide Warrant Coverage

From the company perspective, providing warrant coverage has its advantages as well:

  • Attract investors - Granting warrants can make the funding terms more appealing to investors and secure their investment. This is especially relevant for high-risk, early-stage startups.
  • Investor participation - Warrants provide an incentive for invested shareholders to double down and participate in future rounds to capitalize on their coverage rights. This continued support can be beneficial.
  • Future cash flow - If warrants are exercised, the company brings in additional capital. Though there is dilution, it also provides resources to grow the business.

Understanding the Tradeoffs

There are also notable disadvantages and risks related to providing warrant coverage:

  • Dilution - Any exercised warrants mean dilution for existing shareholders since new shares are issued. Investors get to buy shares at set prices even as the true market value may have risen significantly.
  • Loss of control - If an investor's ownership increases via exercised warrant shares, it reduces proportional control for founders and employees.
  • Mixed incentives - Warrant investors might push for "liquidity events" like a quick sale to capitalize on their holdings, rather than focus on the long-term growth trajectory.

It's important to model potential dilution levels and outcomes before agreeing to warrant coverage terms. The percentages granted should reflect a fair compromise given the stage of the business.

Key Terms of Warrant Coverage

If warrant coverage will be included in a funding round, pay attention to the key terms:

  • Number of shares - The allotment of additional shares the investor has rights over expresses the dollar amount as an absolute share figure or a set percentage of their investment.
  • Strike price - This preset price per share is either fixed or set as a discount to the subsequent round’s price per share.
  • Expiration date - The right to exercise warrant coverage expires on a set future date, typically 3-5 years from the initial investment.
  • Vesting - Warrants may vest and become exercisable in tranches based on milestones or date.

These terms require planning around future funding needs and dilution limits because they are essentially commitments to issue more shares.

Warrant Valuation Considerations

Several variables affect the fair market value of a warrant:

  • Underlying stock price - Warrants become more valuable as the trading price per share rises.
  • Strike price and premium - A lower strike increases warrant value. The percent difference between strike and market prices denotes the intrinsic "moneyness" value.
  • Time value - Longer duration until expiration means higher warrant value.
  • Volatility - Stocks with higher volatility command higher warrant valuations.
  • Risk-free rate - Rising baseline interest rates increase overall warrant valuations

Assessing the Fair Balance on Warrant Coverage

Offering warrant coverage has valid strategic reasons on both sides of the table. Investors have to equally assess their risk-return profile when negotiating the right warrant terms.

From the startup’s perspective, warrant coverage improves funding prospects and attracts crucial investor support. But founders need to gauge resulting dilution, loss of control, and incentive alignment issues.

Smart negotiators try to quantify warrant values based on assumed scenarios and find an equitable compromise. Being too generous or rigid on coverage terms can either lead to unnecessary dilution and loss of control or botched funding deals.

Navigating these tradeoffs and aligning interests is key to an optimal long-term outcome.


Brokerage services are provided by Atomic Brokerage, LLC ("Atomic Brokerage"), a registered broker-dealer and member of FINRA and SIPC. Neither Meow Advisory LLC nor Atomic Brokerage are a bank. Investments in securities are Not FDIC insured, Not Bank Guaranteed, and May Lose Value. Investing involves risk, including the possible loss of principal. Before investing, consider your investment objectives and the fees and expenses charged. For more details about Atomic Brokerage, please see the Form CRS, General Disclosures, and the Privacy Policy. Check the background of Atomic Brokerage on FINRA’s BrokerCheck. Custodial and clearing services are provided to Atomic Brokerage by Pershing LLC. Technology services may be provided by AtomicVest.

Get started with Meow in under 10 minutes

*Disclaimer: Meow Advisory LLC is a registered investment adviser. Registration as an investment adviser does not imply any level of skill or training.
For accounts opened through Atomic Brokerage LLC: Meow Advisory LLC has an engagement with Atomic Brokerage LLC (“Atomic Brokerage”), a registered broker-dealer and member of FINRA and SIPC , to bring you the opportunity to open a brokerage account. Brokerage services for customers of Meow Advisory LLC are provided by Atomic Brokerage. For more details about Atomic Brokerage, please see the Form CRS, General Disclosures, and the Privacy Policy. Check the background of Atomic Brokerage on FINRA’s BrokerCheck.
For subadvisory services for accounts opened through Atomic Invest LLC: Meow Advisory LLC has an engagement with Atomic Invest, LLC (“Atomic Invest”), an SEC-registered investment adviser, to bring you the opportunity to open an investment advisory account. Investment advisory services are provided by Atomic Invest. Companies which are engaged by Atomic Invest receive compensation of 0% to 0.85% annualized, payable monthly, based upon assets under management for each referred client who establishes an account with Atomic Invest (i.e., exact payment will differ). Atomic Invest also shares a percentage of compensation received from margin interest and free cash interest earned by customers with Meow Advisory LLC. Meow Advisory LLC is not a client of Atomic Invest, but our engagement with Atomic invest gives us an incentive to refer you to Atomic Invest instead of another investment adviser. This conflict of interest affects our ability to provide you with unbiased, objective information about the services of Atomic Invest. This could mean that the services of another investment adviser with whom we are not engaged could be more appropriate for you than Atomic invest. Advisory services through Atomic Invest are designed to assist clients in achieving a favorable outcome in their investment portfolio. They are not intended to provide tax advice or financial planning with respect to every aspect of a client’s financial situation and do not include investments that clients may hold outside of Atomic Invest. For more details about Atomic Invest, please see the Form CRS, Form ADV Part 2A, the Privacy Policy, and other disclosures. Brokerage services for Atomic Invest are provided by Pershing Advisor Solutions LLC (“PAS”), a registered broker-dealer and member of FINRA and SIPC.
Neither Atomic Invest nor Atomic Brokerage, nor any of their affiliates, is a bank. Investments in securities are Not FDIC insured, Not Bank Guaranteed, and May Lose Value. Investing involves risk, including the possible loss of principal. Before investing, consider your investment objectives and the fees and expenses charged by Atomic Brokerage and/or Atomic Invest.
See the Legal Section within the Meow website for additional agreements.

U.K. Gilt pricing quoted net of fees. ~5% U.K. Gilt yield is sourced from Investing.com December 2023 6-month United Kingdom 6-Month Bond Yield. ~5% Treasury Bill yield is sourced from treasurydirect.gov December 2023 12-week U.S. Treasury Bill auction.

**Disclaimer: Meow Technologies is a financial technology company, not a depository, bank or credit union, and your account at Meow is not, itself, an FDIC-insured product.

Meow currently partners with three banking providers. Banking services are provided by Third Coast Bank SSB; Member FDIC, Grasshopper Bank, N.A; Member FDIC, and FirstBank, a Tennessee corporation; Member FDIC.

By opening a Maximum Checking account through Meow and if you choose to receive banking services provided by Grasshopper Bank, N.A, you deposit your funds into a deposit account at Grasshopper Bank, N.A. which sweeps those funds into deposit accounts across a network of Federal Deposit Insurance Corporation (“FDIC”)-insured banks, for up to the current standard maximum deposit insurance amount (“SMDIA”) of $250,000 per eligible depositor, per destination institution, for each ownership capacity or category, subject to applicable terms and conditions, including Grasshopper's ICS Deposit Placement Agreement. Grasshopper Bank, N.A. uses a third-party vendor and agent to help administer this sweep process. Visit https://www.intrafi.com/network-banks/ for a list of the banks and savings associations with which we/Grasshopper, N.A. have a business relationship for the placement of deposits at destination institutions, and into which your deposits may be placed (subject to applicable terms with you, and any opt-outs by Grasshopper, N.A. or you). The current maximum deposit insurance amount for your funds is up to $125 million in FDIC insurance through the sweep network of Grasshopper Bank, N.A, subject to change at any time with notice from Meow and/or pursuant to applicable law. Terms and restrictions apply. Subject to applicable rate sheet. Interest rate on checking products quoted in Annual Percentage Yield (APY). Interest rates and yields are effective as per the date on the applicable rate sheet. See applicable terms and restrictions and refer to the applicable rate sheets for additional information.

By opening a Maximum Checking account through Meow and if you choose to receive banking services provided by Third Coast Bank SSB, you deposit your funds into a deposit account at Third Coast Bank SSB. If you also hold funds in a sweep program with Third Coast Bank SSB, Third Coast Bank SSB sweeps those funds into deposit accounts across a network of FDIC-insured banks, for up to the current SMDIA of $250,000 per eligible depositor, per receiving bank, for each ownership capacity or category, including any other balances you may hold at that receiving bank directly or indirectly through other intermediaries, including broker-dealers. Third Coast Bank SSB uses a third-party vendor and agent to help administer this sweep process. Visit Third Coast Bank SSB for a list of the banks and savings associations with which we/Third Coast Bank SSB have a business relationship for the placement of deposits at receiving banks, and into which your deposits may be placed (subject to applicable terms with you, and any opt-outs by Third Coast Bank or you). The current maximum deposit insurance amount for your funds is up to $50 Million in FDIC insurance through the sweep network of Third Coast Bank, subject to change at any time with notice from Meow and/or pursuant to applicable law. Terms and restrictions apply. Subject to applicable rate sheet. Interest rate on checking products quoted in Annual Percentage Yield (APY). Interest rates and yields are effective as per the date on the applicable rate sheet. See applicable terms and conditions and refer to the applicable rate sheet for additional information.

By opening a Maximum Checking account through Meow and if you choose to receive banking services provided by FirstBank, a Tennessee corporation, you deposit your funds into a deposit account at FirstBank, which sweeps those funds into deposit accounts across a network of FDIC-insured banks, for up to the current SMDIA of $250,000 per eligible depositor, per destination institution, for each ownership capacity or category, subject to applicable terms and conditions, including FirstBank's ICS Deposit Placement Agreement. FirstBank uses a third-party vendor and agent to help administer this sweep process. Visit IntraFi for a list of the banks and savings associations with which FirstBank has a business relationship for the placement of deposits at destination institutions, and into which your deposits may be placed (subject to applicable terms with you, and any opt-outs by FirstBank or you). The current maximum deposit insurance amount for your funds is up to $125 million in FDIC insurance through the sweep network of FirstBank, subject to change at any time with notice from Meow and/or pursuant to applicable law. Terms and restrictions apply. Subject to applicable rate sheet. Interest rate on checking products quoted in Annual Percentage Yield (APY). Interest rates and yields are effective as per the date on the applicable rate sheet. See applicable terms and restrictions and refer to the applicable rate sheet for additional information.

***FDIC insurance coverage is only available to protect you against the failure of an FDIC-insured bank that holds your deposits (and does not protect you against the failure of Meow or other third party). Your account with Meow and all services provided to you are subject to the Meow Terms of Service (“Account Agreements”) and other applicable terms and no other representations or warranties, express or implied, are provided to you except as expressly set forth in those written Account Agreements. If you have any questions regarding your account, please contact team@meow.com.

FirstBank Funds Availability Notice

FirstBanks general policy is to allow you to withdraw funds deposited in your account on the first business day after the day we receive your deposit. Funds from electronic deposits will be available on the day we receive the deposit. In some cases, we may delay your ability to withdraw funds beyond the first business day. Then, the funds will generally be available by the SECOND business day after the day of deposit.