Warrant coverage is an agreement between a company and one or more of its investors to give the investor(s) the right to purchase additional shares of the company’s stock at a predetermined price. Warrants are most commonly issued to venture capitalists and private placement investors, allowing them the opportunity to convert debt, other securities, or money into ownership of the company.

Warrants are different from stock options in that they are not offered to the general public, and are not traded on securities exchanges. Warrants are also non-transferable and not tradeable, meaning the investor is entitled to participate only in the issue of warrants that they have specifically agreed to. The rights attached to warrants - such as the right to purchase additional shares -severed when the investor sells or transfers their interest in the company.

The company typically issues warrants to new investors in exchange for a certain amount of capital investment. The agreement specifies the number of shares, the share price, and how long the warrants are valid. If the investor decides to exercise the warrant after the expiry date, they may only receive shares subject to certain conditions and limitations stated in the agreement.

In terms of dilutive equity, when a shareholder exercises their warrant, they are exchanging cash for shares, thus increasing the amount of equity dilution that is created. The new equity dilution is the difference between the amount paid for the warrant and the current market value of the security, which goes to the company when the warrant is exercised.

Warrant coverage can be an effective way for a company to raise capital, as the warrant is often cheaper than raising the same amount of money through an initial public offering. While dilution of equity is a drawback, it can be outweighed by the advantages of lowered cost capital. Additionally, warrant coverage can incentivize investors by providing an opportunity to gain future ownership at a potential cheaper rate, creating a more positive relationship between company and investor.