Apr 3 2007 by Jason

Convertible Warrants In A Series A Round?

Question: What’s your take on Convertible Warrants in a Series A round? What are the implications now and in future rounds for the entrepreneur as well as the VC?

(Jason) I like my Series A rounds to be simple. The A round is always precedent for future rounds. If you haven’t read our term sheet series, now might be a good time to start. Warrants effectively “hide” the valuation of the deal. You’ll see warrants in later round financings where the company doesn’t want to consumate a down round and instead decides to raise more money at the last financing price, but with some warrants included.

Yeah, I know, this really is a down round, as the warrants are additional benefit, but the company can say with a semi-straight face that it sold equity at the same valuation as the last round.

On a Series A deal, why play games with the valuation? Just figure out what makes sense from both sides and execute a deal? I can tell you that if I was looking to lead a Series B deal and the Series A folks had warrants, I’d make sure that I would include all of those warrants in your pre-money valuation. I’d also be pretty confused as to why this was done in the first place.