The Case for Warrants in Strategic Growth Partnerships

The second is specificity. None of the vesting conditions above is abstract. Each tracks the thing the holder controls: volume processed, payments made, capacity deployed, agreements kept in force. Warrants are used where behavior matters, not for commodity vendors, and the vesting schedule is where that behavior gets written down.

2. The economics of a contingent concession

Three features distinguish a warrant from the alternatives a company might offer a partner. Unlike preferred equity, a warrant for common stock typically carries no board seat, no vote before exercise, and no liquidation preference. Unlike debt, it carries no repayment obligation or covenants. Unlike a discount, it costs nothing if the partnership produces no result. That last feature is the economic core.

For an operator, the decision is comparative, not abstract. Without a warrant, the company negotiates on price, discounts, or revenue share. With one, part of that negotiation shifts into equity that accrues only if performance occurs. The question is whether the partner's incremental contribution exceeds the cost of the equity granted.

The comparison is often more favorable than it first appears, because the two forms of consideration behave differently across outcomes. A price concession is fixed: it is paid regardless of what the partner delivers or how the company fares. Performance-vested equity is contingent: it is earned only if value is created. In that sense a warrant behaves like variable cost, denominated in ownership rather than cash.

A simplified illustration makes the shape visible. Consider a company valued at $40 million negotiating a three-year, $3 million agreement with a distribution partner. In the cash-only structure, it negotiates a 10 percent discount and pays $2.7 million. In the warrant structure, it negotiates 25 percent off list, pays $2.25 million, and grants the partner a warrant for 0.5 percent of the company at today's fair value, vesting on volume milestones. The company has preserved $450,000 of cash relative to the discount-only path. What that cash costs depends on where the company ends up.

Exhibit 2: Illustrative comparison at exercise, three years out

Same starting point in each case: a $40 million company, a $3 million agreement, $450,000 of cash preserved by taking a deeper discount and granting a 0.5 percent warrant at today's fair value.

• Downside or flat, company worth $40 million or less. The warrant lapses and is worth roughly nothing to the partner. The company keeps the $450,000 and is ahead by that amount.
• Base case, 3x to $120 million. The warrant is worth about $400,000 to the partner after the exercise price. Against $450,000 of cash preserved, the company is roughly even.
• Upside, 5x to $200 million. The warrant is worth about $800,000 to the partner after the exercise price. The company pays roughly $350,000 more than it saved, in equity, and only in its best case.

Illustrative only. Assumes the warrant is priced at fair value at grant and ignores dilution from intervening rounds, taxes, and accounting effects. A live decision should be modelled on the company's own assumptions.

Three points stand out. In the downside, the warrant costs nothing and the cash saving is real, and this is the scenario in which cash matters most. In the base case, the equity given up is comparable to the cash preserved, and it goes to a partner whose milestones helped produce the growth. In the upside, the company pays more in equity value than it saved in cash, at an implied annual cost in the high teens or low twenties, which is in the range of what venture equity costs. The difference is that this cost is paid only in the scenario where the company can most afford it, and where the partner's contribution is part of the reason.

The comparison is not always favorable. If the partner would have delivered the same volume without the warrant, the equity is a gift. If the company is close to a liquidity event, a warrant priced at fair value carries little time value and may not motivate the partner. And if the vesting conditions are loose, the warrant is a discount in disguise, with all of a discount's certainty and none of its simplicity.

3. When the case holds

Three conditions need to hold together:

• The company has credible growth potential, so the warrant has real value to the partner.
• The partner can influence the outcome, through distribution, infrastructure, capital, or service quality, and that influence can be measured.
• The value of the cash preserved or the terms improved exceeds the expected cost of the dilution across the scenarios the company considers likely.

Where any one is missing, cash is the better answer. A commodity vendor cannot move the trajectory. A partner with no ability to hold or value private equity will not price it. A company that does not believe in its own upside should not be selling it.

4. Design principles

The disclosed transactions differ in scale by orders of magnitude but share a small number of design choices.

1. Tie vesting to contribution the partner controls. The metric should be observable, attributable to the partner, and verifiable by both sides: volume processed, payments made, capacity deployed, integrations completed. Time-based vesting is appropriate when the contribution is the relationship itself, as in a multi-year supply agreement.
2. Size against contribution, not convention. The right coverage is the one that makes the partner's upside proportionate to what it is being asked to deliver. Most private commercial warrants are modest fractions of the company. The larger disclosed grants, such as up to 5 percent of Adyen, went to counterparties that could move the entire business. Benchmarks from comparable executed warrants show where the market has landed; they inform the number without deciding it.
3. Price at fair value and keep governance out. Common stock at fair market value is the default. It keeps the accounting cleaner, avoids the complexity of penny warrants, and gives the partner upside without a preference. Instacart's retailer warrants were written on non-voting common stock, which makes the point directly.
4. Define the term, the caps, and the exits. A warrant should state its term, any ownership cap, what happens on a change of control, and what happens to unvested tranches if the commercial agreement ends. The AMD warrant, by public accounts, cancels unvested shares if the supply agreement is terminated for cause.
5. Decide the accounting with the economics. A warrant to a customer generally reduces revenue; one to a supplier or advisor is share-based payment; one to a lender is a cost of financing. Plug Power recorded its Amazon warrant provision as a reduction of revenue. On the holder's side, eBay carried its Adyen warrant at fair value as a derivative. These treatments follow from the terms, so the terms should be designed with them in view.
6. Write once, reuse. A model form the board and counsel have approved makes the second warrant a repeat of the first rather than a new legal project. Consistency across counterparties is also what keeps the cap table legible.
7. Keep one record for the life of the instrument. Terms, conditions, approvals, valuations, and events belong in a single place that survives staff turnover, financing rounds, and audits. A warrant can run for ten years. Most of its operational risk sits in those years.

5. The partner's side of the table

A warrant only works if the partner values it, so the case has to hold from the holder's seat too.

For the holder, the appeal is asymmetric: no cash outlay, a claim on upside it helps create, and, across a portfolio, a return profile that a fee alone cannot deliver. That portfolio logic is what sustained venture lending for decades. It is also why a growing number of banks, infrastructure providers, and service firms are formalizing how they accept warrants rather than treating each one as an exception.

The holder's obligations are practical. It needs a policy for when it will accept equity, authority to approve it, an accounting position, a valuation approach, and a way to administer what it holds through vesting, financing rounds, and exercise. For regulated holders, there are further constraints on ownership, affiliate transfers, and reporting. The rule is simple: an asset you cannot administer is an asset you cannot accept. Partners that have done this preparation can say yes in the first conversation. Partners that have not tend to revert to cash.

6. Governance, accounting, and the cap table

On the issuing side, the governance is routine once it is set up. The board authorizes a warrant program and a pool, approves a model form, and delegates execution within defined limits. A granted warrant then sits in the fully diluted cap table alongside the option pool, with its conditions disclosed, until it is exercised, expires, or terminates. Voting control and board composition do not change. Investors, who evaluate outcomes more than instruments, will ask the predictable questions: how much, to whom, for what, and whether it interferes with the next round. A benchmarked size, a performance link, and a clean approval pack answer them.

The accounting deserves early attention rather than late surprise. Classification as equity or liability turns on settlement terms, and liability classification brings periodic remeasurement. For holders, treatment is determined instrument by instrument and can change at events such as an IPO. None of this is a reason to avoid the structure. It is a reason to involve accounting advisors at design, not at audit.

7. Why the case is stronger now

Four shifts make this argument more pressing than it was five years ago.

First, companies are smaller and their dependency maps are larger. AI is compressing teams while expanding the number of external systems and partners a company relies on. More of the value chain sits outside the walls, which means more of the outcome is shaped by counterparties.

Second, capital discipline has returned. Longer intervals between rounds raise the value of every dollar of preserved runway, and with it the value of consideration that costs nothing in the downside.

Third, the structure is being demonstrated at the top of the market. The AMD and OpenAI warrant put a decades-old instrument on the front page and made it legible to boards and counsel who had not seen one.

Fourth, and least visible, the implementation problem is being solved. Benchmarks from executed warrants, model forms, simulation tools, and systems of record now exist for this instrument specifically. The complexity that used to be the strongest objection is increasingly a property of how warrants were implemented, not of warrants.

8. From a first transaction to a managed program

The practical path is simpler than it appears. Start with one relationship where the counterparty clearly matters. Define a small number of measurable conditions. Anchor the size and terms to observable benchmarks. Test the economics under a few scenarios before committing. Keep the terms tight and repeatable.

From there the discipline compounds. The second transaction is easier than the first. Terms standardize. Measurement gets clearer. The company moves from negotiation to pattern recognition. Over time, the set of warrants becomes a managed portfolio of relationships, and the advantage stops being any single agreement and becomes the ability to structure, execute, and govern them consistently across counterparties and years.

The same progression applies to the holder. A firm that accepts one warrant well can accept the next one faster, and a firm that runs a program can make equity participation a standing term of how it works with the companies it serves.

Conclusion

The logic is already accepted inside every company. Equity aligns employees to long-term outcomes. Warrants extend the same mechanism to the external partners who shape those outcomes. The precedents show the structure working at every scale where a counterparty could change the result. The economics favor it wherever the partner's contribution is real, measurable, and larger than the equity it earns.

The constraint is not whether the instrument works. It is whether a company applies it with enough discipline to make it effective, and whether it does that preparation before the partnership that matters arrives.

Wrnt, as in warrant, is the infrastructure for stock warrants: benchmarks from comparable executed warrants, model documents, a simulator for the economics, and a single record for every instrument through its life. Drafting a warrant or piloting a program is free. Start at wrnt.co or write to growth@wrnt.co.

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