A warrant is a contract giving the holder the right to buy a fixed number of newly issued shares from the company at a fixed strike, before an expiration date. Unlike listed options, the shares come from the company — so exercise = dilution.
Where warrants come from
Most small-cap warrants are sweeteners attached to financings: PIPE deals, registered direct offerings, or convertible note packages. A 'unit' offering of one share plus one full warrant at the same strike is the most common structure.
SPAC sponsors also create warrants en masse — a fact every 2021 vintage SPAC investor learned the hard way.
The overhang problem
Outstanding warrants sit in the diluted share count whether they're in the money or not. When the stock rips through the strike, warrant holders exercise and immediately sell to lock in gains, capping rallies.
A company can have 30M shares outstanding and 25M warrants struck at $2. Above $2, the effective float is 55M.
Cashless vs cash exercise
Cash exercise: holder pays strike × shares to the company. Cashless: holder surrenders some warrants to cover the strike, netting fewer shares. Cashless is common when the warrant is registered for resale and the holder doesn't want to outlay capital.
Anti-dilution and toxic resets
Many small-cap warrants include anti-dilution clauses that reset the strike lower if the company prices a future offering below the current strike. Combined with full-ratchet provisions, this can spiral into a death loop where each offering triggers more warrant shares.
What to track
Read the 10-K footnotes for warrant tables: count, strike, expiration, anti-dilution terms. The exhibit list will link the warrant agreement itself — open it, search for 'adjustment' and 'reset'.