DEFINITION of Sweetener
A special feature or benefit added to a debt instrument (such as s bond) or a preferred stock offering, aimed at increasing its value in the markets. Two popular forms of sweeteners are warrants and rights, which allow the holder to either convert securities into stock at a later date or purchase shares at below-market prices.
BREAKING DOWN Sweetener
Sweeteners are especially useful for companies that are having a difficult time attracting investors or raising capital at affordable prices. A given company may want to conduct a standard debt offering, however if there isn't enough investor appetite to sell all of the debt, then the sweetener can help attract enough investors to sell the entire issue. Sweeteners will always cost something extra to the company giving them away, but the exact cost may not be calculable until some date in the future.
Warrants are arguably the most common sweetener offered by companies attempting to convince angel investors to invest in new financing rounds. And while warrants have similarities with the more commonly-used options, there are key differences between the two. Both warrants and options are essentially contractual rights that are extended to investors, enabling them to purchase certain amounts of stock, at some future point, at prices that are agreed upon today. Among the chief differences: options are usually perks afforded to a given company’s employees—often used as a hiring enticement measure. Contrarily, warrants are offered to third-party participants—chiefly outside investors, but also bankers, vendors and partners. Warrants are generally one off, "over the counter" transactions, meaning they don’t draw down any pre-approved set-aside pool of shares, as is the case with options.
But while warrants are prized by investors who value upside appreciation rights without requiring any up-front capital commitment, there are potential downsides to these vehicles—for both parties involved.
For the companies, warrants can create uncertainty regarding the number of holders who will ultimately execute their right to exercise their warrants and acquire shares of the company. This could potentially leave companies looking to raise capital, in the lurch. And for investors, there is a risk of the underlying stock price climbing above the strike price to sell, or falling to below the strike price to buy, which effectively makes a warrant worthless. Additionally, holders of warrants do not enjoy voting rights, in the way ordinary stockholders often do.