What Are Debt Warrants? Are They Good for Startups?
Raising capital is challenging, and if you’ve been exploring venture debt or other startup financing, you’ve likely come across debt warrants. Understanding how they work—and whether they make sense for your business—can save you headaches and protect your ownership. Let’s break it down.
What Is a Debt Warrant?
A debt warrant is an agreement giving a lender or investor the right to buy company stock in the future at a price set when the warrant is issued. Many venture debt lenders require warrants to balance the lower interest rates they offer (usually 10–15%) with potential upside if your startup succeeds. Think of it like an employee stock option for investors: if your company grows quickly, the warrant could be very valuable to the lender.
How Do Debt Warrants Work?
Venture debt lenders receive warrants based on a percentage of the loan principal. The strike price (or exercise price) is typically set at your company’s fair market value at issuance, though it can also be based on a negotiated valuation or discounted future round.
If a liquidity event occurs—like an IPO—the lender exercises the warrant if the stock price is above the strike price. If the stock never reaches that price, the warrant expires worthless.
Example: Roku’s 2017 IPO. A venture lender held warrants for 400,000 shares at $9.17/share. On day one, Roku’s stock opened at $15.78 — instantly generating $2.6M in net upside for the lender.
Are Debt Warrants Good for Startups?
Debt warrants can offer strategic alignment but also come with trade-offs. Founders should consider:
Equity Dilution: Exercised warrants increase the true cost of capital. Calculate the potential dilution before agreeing.
Alignment vs. Pressure: Warrants align lender and startup interests when growth is strong, but may create stress if growth lags expectations.
Put Options & Cash Flow: Some lenders may require the startup to buy back warrants after a few years, which can impact cash flow.
Do All Startup Loans Require Warrants?
No. Not all venture debt comes with warrants. Some lenders offer non-dilutive financing, providing cash runway without giving up ownership or complicating your cap table. These solutions are faster, simpler, and more founder-friendly.
The key takeaway? Warrants aren’t inherently bad, but timing and structure matter. Founders often benefit from delaying equity dilution until later stages when it costs less and gives more negotiating power.
Forge Capital Can Help
Navigating venture debt and warrants doesn’t have to be complicated. At Forge Capital, we provide venture debt solutions for founders who want:
Fast funding to keep momentum
Flexible, founder-friendly terms without giving up equity
Guidance on the best financing path for your growth stage
Whether you’re exploring venture debt for the first time or comparing offers, our team works with you to structure funding that fits your business, protects your ownership, and fuels your growth.
