What is Warrant Agreement Drafting?
A warrant agreement is a legal contract between a company and an investor. It specifies that the investor has the right to buy a certain amount of company shares at a certain price during a specific timeframe. It serves to attract investors for companies, while also enabling investors to make use of profitable opportunities.
Read the rest of this article for key terms to include in a warrant agreement, how to draft it accurately, and why you should consider hiring a qualified lawyer to draft it for you.
What are Key Terms to Include in a Warrant Agreement?
A warrant agreement should specify the following terms to provide clarity for both parties.
- Exercise (or strike) price. This is the price per share the investor must pay to buy the shares, which is usually determined by fair market value.
- Share numbers. Explain how many shares the investor is entitled to purchase.
- Stock type. You want to clarify the exact class of equity that’s tied to the warrant.
- Term. There should be a timeframe, such as a specific number of years, in which the warrant is valid.
- Exercise method. The investor must know how they can convert the warrant into shares.
- Vesting structure. There could be milestones that need to occur prior to the warrant being exercisable.
- Default and termination. Include what happens if there is a contract breach and how the contract can be terminated by either party.
How Should You Draft a Warrant Agreement?
When writing a warrant agreement, you should specify some important information to elaborate on the above-mentioned terms. This helps you establish a professional contract that prevents disputes between parties.
Detail the Shares Offered
You should define the exact number and type of shares issuable upon exercise so that there’s no ambiguity. Specify the class or series of stock, and if the number of shares can be amended.
Provide the Exercise Period and Process
Make sure you clearly define the effective date of exercise and its expiration date. You should also explain what happens if the warrant expires.
Mention Change of Control
It’s important to specify how change of control can be navigated. Clarify what happens to the warrant in various events, such as if the company is acquired or merges with another company. This will prevent misunderstandings from causing disputes between parties.
Explain if the warrant is converted, cashed out, or otherwise treated when there is a change of control.
Explain the Holder’s Rights
Your agreement must address if the warrant holder has shareholder rights prior to exercising. Generally, the holder doesn’t have rights, such as voting or consent rights, but this should be included to prevent misunderstandings.
Specify the Exercise Price
The exercise price, or the amount the holder must pay for each share when exercising the warrant, must be clearly defined. Explain how the price is calculated and any times when it could be adjusted.
Include Representations and Warranties
Both parties should make representations and warranties. For example, the company should state that they have the power and authority to authorize the shares and have acquired all the necessary approvals. Similarly, the holder might represent that they have authority to enter into the warrant agreement and understand all risks involved.
Do You Need a Lawyer for Warrant Agreement Drafting?
Warrant agreements usually include details that can be challenging to understand. To prevent drafting errors, it’s advisable to hire a lawyer to draft your agreement for you.
A lawyer can help you by:
- Confirming that the agreement reflects the deal accurately.
- Complying with all applicable securities and other laws to prevent non-compliance issues.
- Defining the warranty accurately, such as by including exercise prices and valid expiration dates.
- Explaining change of control and how to handle it appropriately. A lawyer will consider a range of future events, such as company merges, and how they affect the agreement.
- Drafting provisions to handle transfers and registration rights. These aspects of the agreement can be challenging to understand if you don’t have experience with them.
- Negotiating provisions on your behalf, such as anti-dilution protection and treatment of future equity.
- Confirming that the company has the approvals and authorization to issue and honor the warrant. This provides transparency between parties.
- Preventing ambiguous terms in the agreement that can result in misunderstandings or disputes.
- Helping you to navigate disputes if conflict does arise.
- Reviewing a warrant agreement you’ve already drafted. They’ll check it for hidden risks and missing information, and make appropriate edits to protect your interests.
Where to Find a Lawyer to Draft a Warrant Agreement
If you need to hire a lawyer to draft your warrant agreement, you should use an online legal platform that makes it easy to access lawyers in your region who are experienced in contract drafting.
ContractsCounsel is one of the largest online legal marketplaces that connects you to a network of vetted lawyers. Without leaving your home, you can request that a lawyer on the platform drafts your warrant agreement.
Here are the steps to follow:
- Go to the ContractsCounsel marketplace.
- Post your project for free. Include additional information to help you find the most suitable lawyer, such as the type of shares being offered.
- Receive bids from lawyers. You’ll receive multiple bids from lawyers on the platform who have the experience to help you.
- Review the lawyers’ profiles. The platform provides lawyer data you can check before selecting the right lawyer, such as their location, client ratings for previous projects, expertise, and credentials.
- Connect with a lawyer you think is best suited to your requirements and hire them to draft your warrant agreement for a flat fee.
