Companies looking to borrow money sometimes offer potential lenders an ownership stake in the firm. This ownership stake is referred to as an equity kicker. Another name for it is a "sweetener," which speaks to its purpose -- making the deal more attractive to lenders.
Role in Mezzanine Deals
Equity kickers can be included in any kind of lending arrangement, but they're usually seen in so-called mezzanine finance deals. When you lend a company money in a mezzanine deal -- by buying a junk bond, for example -- you have a lower priority for repayment than the company's other lenders. That means you're taking on more risk. The company can compensate you for that extra risk in several ways. It could pay you a higher interest rate on the borrowed money, for example, or it could offer you a slice of ownership in the company. That's the equity kicker. If the company really takes off, the equity kicker could explode in value.
Warrants as Kickers
Equity kickers commonly come in the form of stock warrants. A warrant is a contract that allows you to buy shares of stock directly from the company at a predetermined "strike price." If you have warrants for 1,000 shares of stock with a strike price of $20, and the company's stock is currently trading at $35, then those warrants have a $15,000 profit built in. Functionally, warrants work much like options, although there are significant differences in tax treatment.