Warrants and Equity Kickers in Dutch VC Deals

Additional investor upside in bridge financings and venture debt, without issuing the equity at closing

Warrants and equity kickers are often used where an investor or lender wants additional upside without taking more equity at closing. They can help bridge a valuation gap, reward investors supporting a bridge round or form part of a venture debt package.

For a Dutch BV, the economics are only half of the exercise. A warrant also needs to fit the fully diluted cap table, shareholders’ agreement, articles of association and Dutch share issuance mechanics. That becomes particularly relevant when the warrant is exercised, a new financing round starts or the company is sold.

The issue sits within the broader Dutch venture capital financing practice: internationally familiar financing terms often work perfectly well in a Dutch BV, provided the corporate implementation is dealt with at the same time.

When are warrants useful?

A warrant normally gives the holder the right to acquire shares at an agreed price or under an agreed formula. In VC transactions, it is usually granted to an investor, lender or other financier rather than to an employee.

The instrument can be useful where the parties agree on the need for funding but not entirely on valuation. A bridge investor may provide interim financing and receive a warrant as additional compensation for taking risk before the next priced round.

The same applies to venture debt. Interest and repayment remain the principal economics, while a limited warrant package allows the lender to participate in part of the future equity upside.

The percentage itself can be misleading. “5% warrant coverage” means little unless the documents also explain 5% of what, calculated when, at which exercise price and for which class of shares.

Cap table and dilution

Warrants should be included in the fully diluted cap table from the moment they are granted. Waiting until exercise understates the economics of the financing.

This matters where warrants sit alongside convertible loans, employee options and a later preferred round. Each instrument may appear modest on its own while the combined dilution for founders can be significant.

Incoming investors will also want to understand whether outstanding warrants affect the pre-money capitalization and what shares the holder receives on exercise. Ordinary shares and preferred shares may have very different economic consequences.

In practice, I would want the warrant economics reflected in the cap table before the financing documents are finalised, rather than reconstructed when the next investor starts its due diligence.

Warrants are not convertibles or employee options

A warrant should not be confused with a convertible loan. With a convertible loan, the investment itself converts into equity. A warrant normally creates an additional right to acquire equity and may remain separate from the underlying financing.

A bridge financing can therefore create two layers of dilution: conversion of the loan, perhaps at a discount or valuation cap, followed by exercise of the warrant. That may be justified where an investor takes genuine additional risk, but founders should assess the financing package as a whole.

Employee options serve another purpose. They are principally incentive and retention instruments, with issues such as vesting and leaver treatment. Investor warrants are financing instruments. Although the Dutch share issuance mechanics can overlap, I would normally keep the two arrangements separate in both the documentation and cap table. For the employee-equity position, see Share Options for Dutch Startups and Scale-Ups.

Dutch BV implementation

Granting a warrant does not make the holder a shareholder of a Dutch BV. If exercise results in the issue of new shares, that issue must still be validly approved and completed by Dutch notarial deed.

The warrant should therefore be checked against the existing articles of association and shareholders’ agreement. Depending on the structure, relevant points include the authority to issue shares, pre-emption rights, investor consent rights, the share class to be issued and an obligation for the warrant holder to accede to the shareholders’ agreement.

This is where foreign financing documentation sometimes needs a Dutch implementation layer. The warrant itself may clearly state that the investor is entitled to shares, while leaving open who must approve their issue or how existing pre-emption rights are dealt with.

I would not leave those points until exercise. If the company promises future Dutch BV shares, the route to issuing those shares should already work when the warrant is granted.

Exercise and exit

The warrant needs clear exercise mechanics. The documentation should specify the exercise price, expiry date, relevant share class, payment mechanics and whether cashless or net exercise is permitted.

Exit treatment deserves the same attention. Depending on the deal, the warrant may be exercised immediately before closing, settled economically, dealt with through net exercise or lapse if it is out of the money.

What should be avoided is having to negotiate the position for the first time during the sale process. An outstanding warrant is part of the capitalization of the company and a buyer will expect it to be dealt with in the transaction mechanics.

The same applies to a new financing round. A new investor may require existing warrants to be reflected in the pre-money capitalization or addressed as part of the round. Unclear drafting can then affect both dilution and valuation discussions.

Practical conclusion

Warrants and equity kickers can work well in Dutch bridge rounds, venture debt and other growth financings. They allow a financier to receive additional upside without requiring the company to issue that equity immediately.

For founders, the relevant question is the total dilution created by the financing package. For investors and lenders, it is whether the promised equity can actually be obtained on the agreed terms.

In a Dutch BV, that means the warrant terms, fully diluted cap table, shareholders’ agreement, articles of association and notarial implementation must line up. Those points are easier to settle when the financing is agreed than at the next round or during an exit.

FAQ

Can a Dutch BV grant warrants?

Yes. A Dutch BV can grant a contractual right to acquire shares. The later issue or transfer of those shares must still comply with Dutch corporate and notarial requirements.

Does a warrant immediately make the holder a shareholder?

No. The holder normally becomes a shareholder only after valid exercise and the valid issue or transfer of the underlying shares.

Do warrants cause dilution?

They can. If exercise results in newly issued shares, the existing shareholders are diluted. Warrants should therefore be included in the fully diluted cap table from the outset.

What happens to a warrant on an exit?

That depends on the documentation. The warrant may be exercised before closing, settled economically, dealt with through net exercise or cancelled. The treatment should be agreed when the warrant is granted rather than during the exit process.

About Dirk de Waard

Dirk de Waard is a Dutch corporate, M&A and venture capital lawyer and partner at Venture Lawyers in Amsterdam. He advises international investors, founders, growth companies and deal counsel on Dutch VC financings, convertible instruments, warrants, venture debt and Dutch BV implementation.

Using warrants or equity kickers in a Dutch financing?

Dirk advises on the Dutch venture capital workstream, including warrant terms, cap table impact, shareholder approvals, investment and shareholders’ documentation and coordination of Dutch notarial execution.

Contact Dirk at dirk.dewaard@viottalaw.com to discuss a Dutch financing involving warrants or other equity-linked instruments.