A warrant is a type of financial instrument that gives the holder the right, but not the obligation, to buy (call warrant) or sell (put warrant) a specific number of underlying securities at a predetermined price (known as the exercise or strike price) before a set expiration date.
Key Characteristics of Warrants
- Issued directly by companies, often alongside other securities
- Longer term than traditional options, often lasting several years
- Can be traded on exchanges or over-the-counter markets
- Often used as a sweetener to make other securities more attractive to investors
How Warrants Work
When a warrant is exercised, the company issues new shares to fulfill the warrant obligation, which can lead to dilution of existing shareholders. The value of a warrant is influenced by factors such as the price of the underlying security, time until expiration, and market volatility.
Types of Warrants
- Traditional Warrants: Issued alongside bonds or preferred stock
- Naked Warrants: Issued on their own, not attached to another security
- Covered Warrants: Issued by financial institutions rather than companies
Warrants vs. Stock Options
While similar to stock options, warrants differ in several key ways:
- Issued by companies rather than created by market participants
- Generally have longer lifespans than options
- When exercised, result in the creation of new shares, potentially diluting existing shareholders
Tax Implications
The tax treatment of warrants can vary by country. For example:
- In Norway: No taxation on acquisition if acquired at fair market value. Taxed as income upon exercise.
- In Denmark: No taxation on acquisition or exercise. Gains from selling underlying shares taxed as share income.
- In Sweden: No taxation on acquisition or exercise. Gains from selling underlying shares taxed as capital gains.
Employee Warrants
An employee warrant is a type of equity compensation that gives employees the right to purchase company stock at a predetermined price (strike price) within a specified time frame. It's often used as an incentive to attract and retain employees by offering them a stake in the company's success.
Key Characteristics
- Issued directly by companies to employees
- Typically have a longer term than traditional stock options
- Exercise results in the creation of new shares, potentially diluting existing shareholders
How Employee Warrants Work
When an employee exercises a warrant, they purchase shares at the predetermined strike price. If the company's stock price has increased since the warrant was granted, the employee can potentially profit from the difference.
Vesting
Employee warrants often come with a vesting period, during which the employee must work for the company to earn the right to exercise the warrants.
Tax Implications
The tax treatment of employee warrants can vary by country. For example:
- In Sweden: No taxation on acquisition or exercise. Gains from selling underlying shares are taxed as capital gains
Benefits for Companies and Employees
Employee warrants can be a valuable tool for both companies and employees. They offer potential for significant returns and align employee interests with company success. However, they also come with risks and complexities that require careful consideration.