Warrants and LLC waterfalls
Warrants give the holder the right to buy a specified number of units at a predetermined price, known as the exercise price. The holder can execute the warrant for all or part of the shares granted at any time before the warrant's expiration. Warrants are like stock options without a vesting schedule. As warrants can be exercised at any time, how they're used in the waterfall calculations depends on their vesting status.
Different vesting status for warrants
Exercised warrants
If a warrant has been exercised, the resulting shares are treated like any other shares of the same class. These shares participate in the waterfall, receiving a return of capital based on the number of shares in the allocation and the price per unit (PPU) of the underlying class.
Unexercised warrants
Unexercised warrants aren't automatically included in the waterfall calculations unless specifically included in the waterfall steps. Make sure you have taken the steps to include them so they're exercised correctly during the waterfall calculation.
Include unexercised warrants
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Create classes for each exercise price.
Tip
Where there are warrants with different exercise prices for the same class, create separate subclasses for each price, and name them accordingly.
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Add the PPU distribution step to the waterfall for each exercise price.
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Include the warrant’s specific subclass as a participating class alongside the main class.
