Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use SPAC Warrants to Keep Upside After Going Public
Transcript
- Lucas: Luna, I want to talk about something that I think is one of the most misunderstood tools in the exit playbook: SPAC warrants. Luna: Okay, I'm intrigued. Because when people talk about SPACs, they usually focus on the merger itself — the de spac, the redemption risk. Warrants feel like a footnote. Lucas: They are a footnote in most coverage, but for founders, they can be the difference between walking away with cash and actually participating in the upside after going public. Let me set the scene. Lucas: A SPAC is essentially a shell company that raises money in an IPO and then merges with a private company. The investors in the SPAC get units — typically one share of common stock plus a fraction of a warrant. The private company's shareholders, including founders, get a combination of stock and warrants as consideration. Luna: Right. So the warrants give the holder the right to buy more shares at a fixed price — usually $11.50 per share — for a set period after the merger. Lucas: Exactly. And that's the key. For founders, those warrants can be a huge source of additional value if the stock performs well. But they also create complexity around dilution, accounting, and timing. Luna: So let's talk about that. I've seen deals where founders get warrants that are structured as 'earnout' warrants — tied to hitting certain stock price targets. How common is that? Lucas: Very common. In fact, in a lot of today's SPACs, the earnout warrants vest only if the stock trades above, say, $15 or $20 for a certain number of days. That aligns the founder's incentives with long-term performance. But it also means if the stock languishes, those warrants are worthless. Luna: And we've seen plenty of SPACs trade below $10 for extended periods. Look at Palantir — it's down over 6 percent in the last five days alone, currently around $128. But it went public via a direct listing, not a SPAC. Lucas: Good point. Palantir is actually a useful contrast. They chose a direct listing specifically to avoid the SPAC structure — no warrants, no redemption, no dilution from a sponsor promote. But for companies that do go the SPAC route, warrants can be a powerful tool. Lucas: Let me give you a concrete example. Say a founder's company merges with a SPAC at a $1 billion valuation. The founder gets 10 million shares and 5 million warrants, each exercisable at $11.50. If the stock goes to $20, the founder can exercise those warrants for $11.50 each, instantly creating a paper gain of $8.50 per warrant. Luna: That's $42.5 million in additional upside from warrants alone. But there's a catch, right? The warrants themselves have an expiration date, and if the stock doesn't hit that level before expiration, they expire worthless. Lucas: Right. The typical warrant term is five years from the merger. So there's a ticking clock. And there's another wrinkle: the company can usually call the warrants for redemption if the stock trades above a certain threshold — often $18 — for a certain period. That forces warrant holders to either exercise or sell them. Luna: So it's not passive. Founders need to actively manage their warrant positions. I've heard stories of founders forgetting about warrants and missing the window. Lucas: Absolutely. And that's where the education gap is. A lot of founders are laser-focused on the merger negotiations and then move on to running the public company. They don't pay attention to the warrants until it's too late. Lucas: Now, let's connect this to the current market. We're in June 2026, and the SPAC market has cooled significantly from the frenzy of 2020 and 2021. But deals are still happening. And the terms have gotten more founder-friendly in some ways. Luna: How so? Lucas: Well, in the early days, sponsors were taking a huge promote — often 20 percent of the SPAC's equity for almost no investment. That's come down. And warrant coverage for the target company's shareholders has increased. Founders are getting more warrants per share than they used to. Luna: So the balance of power has shifted a bit. But there's still the issue of dilution. If all those warrants get exercised, the share count balloons. That can depress the stock price. Lucas: That's the warrant overhang problem. If the market knows there's a big block of warrants that could be exercised, it can cap the stock's upside. Investors worry about future dilution. So companies sometimes do warrant exchanges — they offer to swap warrants for shares at a lower conversion ratio to reduce the overhang. Luna: I saw that with Coinbase. They had warrants from their direct listing, actually? No, Coinbase went public via direct listing too. But some of the SPACs in the crypto space had huge warrant overhangs. Lucas: Right. Coinbase is another direct listing example. But look at a company like Digital World Acquisition Corp — the SPAC that merged with Trump Media. That had a massive warrant structure. The stock has been volatile, and the warrants have been a point of contention. Luna: So what's the takeaway for a founder today who's considering a SPAC? Should they push for more warrants, or less? Lucas: It depends on their conviction about the stock's long-term trajectory. If they believe the company will trade significantly above the warrant exercise price, they want as many warrants as possible. But they also need to understand the redemption and call provisions. Lucas: There's also an alternative structure: the earnout shares. Instead of warrants, some founders get additional shares that vest based on stock price performance. Those are less dilutive if the stock doesn't perform, because the shares never vest. Luna: So it's a tradeoff between potential upside and certainty. Warrants offer more leverage, but earnout shares are cleaner. Which do you see more often in 2026? Lucas: I'd say earnout shares are becoming more common because they're simpler to account for. But warrants are still very much in play, especially for larger deals. The key is for founders to get good legal and financial advice specifically on the warrant terms. Luna: And not just at signing, but throughout the life of the warrants. Speaking of which, I want to mention something that I think is really valuable for our listeners who are founders. If you're finding these deep dives into exit mechanics useful, we keep this show ad-free and independent thanks to listener support. Lucas: Yeah, it's a small thing but it makes a big difference. If today's episode gave you a new angle on SPAC warrants or helped you think about your own exit strategy, you can buy us a coffee at buy me a coffee dot com slash fexingo. That's it — no Patreon tiers, no merchandise, just a way to say this content matters. Luna: And it really helps us keep digging into these niche topics that don't get covered elsewhere. So, back to warrants — one more thing I want to highlight is the tax treatment. If a founder exercises warrants, they have a tax event. It's not free money. Lucas: Great point. Exercise of a warrant is a taxable event — the difference between the exercise price and the fair market value of the stock is ordinary income. That can be a big surprise come April 15th. So founders need to plan for that. Lucas: Some companies offer cashless exercise — the warrant holder gets a reduced number of shares without having to put up cash. That avoids the cash outlay but still triggers tax. Luna: Right. So it's not just about the upside; it's about the liquidity to exercise and the tax liability. That's a lot for a founder to manage while running a public company. Lucas: Exactly. And that's why we're doing this episode. Founders need to understand that warrants are not just a bonus — they're a financial instrument that requires active management. Ignore them at your peril. Luna: Alright, so let's wrap with a forward-looking thought. With the SPAC market maturing, do you expect warrant structures to evolve further? Lucas: I do. I think we'll see more innovation in warrant design — maybe warrants with adjustable exercise prices, or warrants that are tied to ESG metrics. The basic structure has been around for decades, but the context is always changing. Founders who stay informed will have an edge. Luna: And that's the goal of this show — to give you that edge. Thanks for listening.