The Warrant Program Check List
— A lawyer will be your most expensive saving, but preparation can make it cheaper
It goes without saying that people are the most vital resources for a startup’s success. As investors, our mantra has almost become ‘we would rather invest in A teams with a B idea, than a B team with an A idea’. But it’s also a fact that founders need to get topnotch employees on board and keep their fire going, even though they can’t offer much security, comfort, or a big fat pay check. That’s why we and many other investors like to see and highly encourage that there’s equity set aside for future key hires and that this is integrated in the startup’s warrant program. Because if there’s one thing you can offer as a founder, even in the early stages, when you’re not exactly Scrooge McDuck, it’s a small piece of that cake your key hires are helping you grow bigger.
And in times like these, looking into future economic hardship, setting up a warrant program may be a way for many startups to evade limited liquidity for key hires.
Unfortunately, around 400 investments has shown us time and time again that warrant programs are something that never cease to get founders into trouble. We’ve seen an endless series of poor warrant programs “fucking up” cap tables due to bad (or early) leavers getting too big a slice of the cake. Often it puts startups in legal trouble, costing them way more in lawyer expenses than it costs to get the appropriate legal help from the very start.
Just don’t do it at home
Sometimes founders have just done a slapdash job and ends up with a program that doesn’t have the intended effect. The problem with warrant programs is that you can’t cut corners or apply a standard template.
The legal complexity of a warrant program cuts across tax law, company law, employment law and law of contract, just to mention a few. And if you can figure all of that out with no hiccups, be our guest. To us investors, there’s only one way.
You just don’t do a warrant program on your own. Warrant programs should not be done without the help of a lawyer. Period. Money is scarce in any startup, but it’s going to be your most expensive saving.
However, there’s money to be saved if you’re well prepared before you meet with a lawyer. In our experience, many lawyers will most often provide you with a lot of options, but not tell which of them to choose. Therefore, founders sometimes leave the first meeting just as clueless as they arrived. Our in-house lawyer Anne-Cathrine Wilhjelm and our Investment team have put together a check list with rules of thumb and vital things to cover in a warrant program. And since we’re strong believers in sharing is caring, there’s no need to keep it to ourselves and our portfolio
The check list — best practice for setting up you warrant program:
It may seem like somewhat of a mouthful, which underlines our recommendation of using a lawyer. Hopefully, the checklist provides for an overview of the basics any warrant program should cover — as a minimum. With this list and proper preparation, meeting with your lawyer should be more productive and cheaper.
And the help doesn’t stop here, head to PreSeed Academy, to avoid the 6 most common fuck ups in employee incentive programs or get hands-on experience on motivating and retaining talent from Templafy founder, Christian Lund.