Warrant Coverage Above 10%

Why it matters

Warrant coverage at 5% on a $10M loan means the lender gets warrants for $500K of equity at the current round price. That's reasonable compensation for taking debt risk in a venture-backed company. At 15%, they're getting $1.5M of equity exposure plus 100% repayment plus 8–12% interest — which means they're sharing your upside without sharing your downside. In a strong exit, the warrant gets exercised and dilutes the cap table by 1–3%; in a flat or down round, the warrant repricing language can dilute it by far more. Some venture debt providers stack warrants from multiple loan tranches, ending up with effective equity ownership comparable to a small VC investment — but with full liquidation preference and no risk of loss.

How to negotiate

Cap warrant coverage at 5% of loan principal for early-stage venture debt, 7.5% for growth-stage. Insist that warrants are priced at the current round (not at a discount), and that they expire at 5–7 years from issuance, not perpetual. Negotiate that warrants do not reprice if you raise a down round — many term sheets have automatic full-ratchet repricing on warrants that founders never notice. If the lender wants more than 10% coverage, ask them why their loan is priced as a debt instrument at all.

Example language

How this clause typically appears in a debt agreement or note. Read it carefully — the language that triggers default is often buried in routine paragraphs.

In connection with the Loan, the Borrower shall issue to the Lender warrants to purchase shares of Series A Preferred Stock equal to fifteen percent (15%) of the Loan Amount, exercisable at the Series A Original Issue Price, with full-ratchet anti-dilution protection until the IPO or sale of the Company.