Dilution/Dilution 101
Warrants vs Options: Who Issues Them and Why Only Warrants Dilute
A warrant is written by the company and creates new shares when exercised; a listed option is a contract between investors cleared by OCC. How each works.
The short version
| Warrant | Listed equity option | |
|---|---|---|
| Who writes it | The company itself | Another investor (the option writer) |
| Issuer and clearing | The company, often through a warrant agent | The Options Clearing Corporation (OCC) |
| Where the terms live | A warrant agreement or warrant form filed with the SEC | Standardized exchange terms described in OCC's options disclosure document |
| Size | Any number of shares the deal sets | Generally 100 shares per contract |
| Typical life | Often five years in small-cap deals | Months, with monthly series expiring on the third Friday |
| Exercise style | Set by the agreement | American-style for standard equity options |
| On exercise, shares come from | New shares issued by the company | Existing shares delivered by the assigned writer |
| Cash on exercise goes to | The company | The writer of the call |
| Share count after exercise | Higher | Unchanged |
A warrant is a promise by the company to sell new shares, so exercising it dilutes. A listed option is a contract between two investors over shares that already exist, so exercising it does not. The two look alike on paper: both give the right to buy stock at a fixed price before a date. The difference is who is on the other side of the trade.
Employee stock options sit in the warrant column for this purpose. The company grants them, and an exercise is usually settled with newly issued or treasury shares, which is why they count in a company's diluted share count.
Who stands behind each contract
When you exercise a warrant, you send the exercise price to the company (or its agent) and the company issues you shares. Those shares did not exist before. That is the whole of the warrant overhang problem: every outstanding warrant is a potential new share.
A listed option works differently. In SEC Release 33-8171 (2002), which exempted standardized options from Securities Act registration, the SEC described OCC as "the issuer and clearing facility for all U.S. exchange listed securities options." The company whose stock underlies the option is not a party. When a call holder exercises, OCC assigns the exercise to a clearing member carrying a short position in that series, and that writer delivers 100 existing shares in exchange for the strike price. OCC's product specifications state that exercise of a standard equity option results in delivery of the underlying shares on the first business day after exercise (T+1).
So the share count reported on a company's next 10-Q cover page moves with warrant exercises and is unaffected by listed option exercises, however large the open interest.
A worked comparison
Hypothetical. Company X has 50,000,000 shares outstanding and a stock price of $3.00. Two things exist at a $2.00 strike:
- 10,000,000 company-issued warrants, each for one share.
- 10,000 listed call contracts, each for 100 shares (1,000,000 shares in total).
All of them are exercised.
| Warrants exercised | Listed calls exercised | |
|---|---|---|
| Shares delivered | 10,000,000 | 1,000,000 |
| New shares created | 10,000,000 | 0 |
| Shares outstanding after | 60,000,000 | 50,000,000 |
| Cash to the company | $20,000,000 | $0 |
| Cash to call writers | $0 | $2,000,000 |
| A 1.00% holder now owns | 0.83% | 1.00% |
The call exercise moves 1,000,000 shares from one account to another. The company's balance sheet and share count do not change. The warrant exercise brings the company $20 million and gives every existing holder a smaller slice.
A real warrant issue, with the arithmetic
Hyperfine (HYPR) filed an 8-K on February 11, 2025 describing a registered direct offering of 4,511,278 Class A shares, each sold with a warrant to buy one more share, at a combined price of $1.33. The warrant terms are stated in the filing:
From the filing
Form 8-K“The Warrants have an exercise price of $1.33 per share, are immediately exercisable and will expire five years from the initial exercise date.”
What Signal8 extracts:Warrant exercise price: $1.33; term: five years from initial exercise date
Form 8-K · filed 2025-02-11 · accession 0001193125-25-024326
The cover page of the company's 10-K for 2024 reported 62,776,930 Class A and 15,055,288 Class B shares outstanding as of March 3, 2025, or 77,832,218 in total. Its earlier 10-Q reported 57,893,458 Class A shares as of November 1, 2024, so the offering's 4,511,278 shares account for most of the increase between the two dates.
| Input | Value |
|---|---|
| Warrant shares | 4,511,278 |
| Exercise price | $1.33 |
| Shares outstanding, March 3, 2025 (Class A + B) | 77,832,218 |
The warrant form filed as Exhibit 4.1 also allows a cashless exercise if no effective registration statement covers the warrant shares at the time of exercise. In that case the company receives no cash and issues fewer shares than the full 4,511,278. These figures describe the filing as made; later events such as further exercises or a split would change them, so check the most recent 10-Q before using them.
What the warrant agreement controls
A listed option's terms are standardized by the exchange and change only for corporate actions such as splits or mergers. A warrant's terms are whatever the company and the buyers negotiated, and they are filed with the SEC, usually as an exhibit to an 8-K or a registration statement. The clauses that matter most:
- Exercise price and expiry. Five years is common in small-cap financings, but the term is set deal by deal.
- Exercise method. Cash, cashless, or both, often conditioned on whether the warrant shares are registered.
- Adjustments. Every warrant adjusts for splits and stock dividends. Some also reset the price after a lower-priced issuance, covered in resets and ratchets.
- Ownership caps. A 4.99% or 9.99% beneficial ownership limit on exercise, explained in ownership blockers.
- Near-zero strikes. A pre-funded warrant is paid for almost entirely up front and behaves almost like a share.
Some warrants are themselves listed and trade under their own symbol, common with SPAC warrants. Listing does not change the mechanics: exercise still creates new shares from the issuer.
How each shows up in diluted share counts
Under ASC 260, diluted earnings per share includes in-the-money warrants and employee options using the treasury stock method: the exercise proceeds are assumed to buy back shares at the period's average market price, and only the net shares are added. Listed options written by investors never appear, because the company has no obligation under them.
Hypothetical: 1,000,000 warrants at $2.00, average price $4.00. Proceeds of $2,000,000 buy back 500,000 shares, so 1,000,000 − 500,000 = 500,000 net shares enter the diluted count. The treasury stock method is an accounting convention; the full 1,000,000 shares are what a cash exercise would actually issue.
Employee options are disclosed in the equity compensation notes of the 10-K and 10-Q, and the shares behind them are registered on Form S-8, compared in S-3 vs S-8.
How to check a company on Signal8
- The dilution screener lets you compare companies on dilution-related data, including outstanding warrants.
- A company's Dilution tab, for example HYPR's, lists warrant instruments with links to the filings they came from.
- The live SEC filings feed shows 8-Ks with securities purchase agreements as EDGAR accepts them.
- For totaling every warrant series from a 10-Q table, read warrant overhang.
The source texts: OCC's equity options product specifications and SEC Release 33-8171.
FAQ
Are warrants and call options the same thing?
They give the same right, to buy stock at a fixed price before a date, but they are different contracts. A warrant is written by the company, so exercising it creates new shares and sends the exercise price to the company. A listed call is written by another investor and cleared by OCC, so exercising it moves existing shares from the writer to the holder. Warrants also tend to run for years, while listed calls typically expire within months.
Does options trading dilute a company's stock?
Trading or exercising listed options does not change the number of shares outstanding. OCC is the issuer of exchange-listed options, and an exercised call is settled with shares the assigned writer already owns or buys. Employee stock options are different: the company grants them and settles exercises with new or treasury shares, so they can dilute holders in the same way warrants do.
Why do warrants last longer than listed options?
Their terms are negotiated in each financing rather than set by an exchange. In small-cap offerings, investors often receive warrants with a five-year term as part of the price of buying the shares, which gives them a long period in which to exercise if the stock rises above the strike. Listed equity options are standardized, with expiration dates fixed by the options market that lists each series.
How many shares does one option contract cover compared with one warrant?
A standard listed equity option covers 100 shares, according to OCC's product specifications, although corporate actions can produce adjusted contracts covering a different number. A warrant usually covers whatever the agreement states, most often one share per warrant in small-cap deals, so a single offering can create millions of warrants. The warrant agreement filed with the SEC gives the exact number of warrant shares and any adjustment terms.
Sources
- SEC accession 0001193125-25-024326 Hyperfine, Inc. 8-K, filed 2025-02-11, Items 1.01/8.01: registered direct offering of 4,511,278 Class A shares and warrants to purchase up to 4,511,278 shares at a combined price of $1.33; warrants exercise price $1.33, immediately exercisable, expire five years from the initial exercise date; EX-4.1 warrant form with cashless exercise if no effective registration statement
- SEC accession 0000950170-24-125624 Hyperfine, Inc. 10-Q, filed 2024-11-12, cover page: 57,893,458 Class A and 15,055,288 Class B shares outstanding as of November 1, 2024
- SEC accession 0000950170-25-040281 Hyperfine, Inc. 10-K, filed 2025-03-17, cover page: 62,776,930 Class A and 15,055,288 Class B shares outstanding as of March 3, 2025
Terms in this guide
- Warrant overhang
- Warrant overhang is the block of shares that could be created if a company's outstanding warrants are exercised, potential dilution not yet in the shares outstanding figure.
- Cashless exercise
- A cashless exercise is a way to exercise a warrant or option without paying cash, where the holder receives only the net number of shares whose value exceeds the exercise price.
- Pre-funded warrant
- A pre-funded warrant is a warrant sold for almost the full share price up front, leaving a nominal exercise price such as $0.0001, so a buyer can stay under ownership limits until it exercises.
- Registered direct offering
- A registered direct offering is a sale of new shares to a small group of investors, arranged by a placement agent off an effective shelf, so the shares are freely tradeable at closing.
- Form 8-K
- A Form 8-K is the SEC current report a public company files, generally within four business days, to disclose material events such as agreements, offerings, executive changes and listing notices.
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