A piggyback option is a type of financial instrument that allows investors to buy shares of a company at a predetermined price, known as the exercise price, on or before a specific date, known as the expiration date. Piggyback options are often issued in conjunction with another security, such as a warrant or a convertible bond, and they typically have a higher exercise price than the underlying security.
Piggyback options can be beneficial for both investors and companies. For investors, piggyback options offer the potential to purchase shares of a company at a discount to the market price, especially if the company’s stock price rises. For companies, piggyback options can be used to raise additional capital or to incentivize investors to purchase the underlying security.
There are two main types of piggyback options:
- Piggyback warrants: These are warrants that are attached to another security, such as a common stock or a convertible bond. Piggyback warrants typically have a higher exercise price than the underlying security, and they may have a longer expiration date.
- Piggyback registrations: These are registrations that allow investors to sell their shares of a company through an initial public offering (IPO). Piggyback registrations are typically used by early investors, founders, and other company insiders who negotiated the right to sell their shares as part of any future IPO.
How do Piggyback Options Work?
When a company issues a piggyback option, it is essentially giving the option holder the right to purchase shares of the company at a predetermined price. The option holder can exercise the option at any time before the expiration date, and they will be obligated to purchase the shares at the exercise price.
If the company’s stock price rises above the exercise price, the option holder will be able to purchase the shares at a discount to the market price. However, if the company’s stock price falls below the exercise price, the option holder will not be obligated to purchase the shares, and the option will expire worthless
Piggyback options can be a complex investment, and it is important to understand the risks involved before investing. Some of the risks associated with piggyback options include:
- The risk that the company’s stock price will not rise above the exercise price. If the company’s stock price does not rise above the exercise price, the option will expire worthless, and the option holder will lose their investment.
- The risk that the company will not be able to meet its financial obligations. If the company is unable to meet its financial obligations, it may be forced to file for bankruptcy, and the option holder may lose their investment.
- The risk that the option will be illiquid. Piggyback options are often illiquid, which means that it may be difficult to find a buyer for the option if the option holder wants to sell it.
Example of a Piggyback Option
Let’s say that a company issues a piggyback warrant with an exercise price of $10. The warrant is attached to a common stock that is currently trading at $8. If the company’s stock price rises to $12, the warrant holder will be able to exercise the warrant and purchase the shares at $10, even though the market price is $12.
However, if the company’s stock price falls to $7, the warrant holder will not be obligated to purchase the shares, and the warrant will expire worthless.
Piggyback options can be a complex investment, but they can also be a valuable tool for investors who are looking to gain exposure to a company’s stock at a discount to the market price. However, it is important to understand the risks involved before investing in piggyback options.
How Piggyback Registrations Work
Some investors may want to set themselves up to sell their shares as soon as the company goes public when it is approaching an IPO. In order to do this, those investors can persuade the company’s underwriter for the initial public offering (IPO) to include their shares in addition to the larger group of shares being sold in the IPO. The shares of those investors would be referred to as a “piggyback registration” and disclosed as part of the IPO’s prospectus documents if the underwriter grants their request.
Piggyback registrations, as seen from the company’s point of view, are an easy way for a number of early funders and other insiders to withdraw their investments and create space for new investors who might be more intrigued by the company’s long-term prospects. After all, in their early years, companies frequently go through multiple fundraising phases, with each investor bringing their own investment style, goals, and time horizon. An impending IPO is probably going to be seen by a lot of those investors as a convenient opportunity to profit from their investment.
The second significant disadvantage of employing a piggyback registration, aside from the fact that their holder cannot choose when to exit, is that underwriters typically give them less priority than demand registrations. In actuality, this means that some or all of the piggybacking investors might not be able to participate if the underwriter determines that there is not enough market demand to sell all of the shares that investors wish to sell through the IPO.
What Is a Piggyback Registration?
The process of selling shares through an initial public offering (IPO) is known as “piggyback registration.” Early backers, founders, and other business insiders who negotiated the right to sell their shares in any upcoming initial public offering (IPO) usually use it.
Investors using piggyback registration to sell their shares do not have the authority to force an IPO, in contrast to demand registration, where shareholders can demand that a company conduct an IPO. As a result, they are forced to “piggyback” on other investors’ demand registration rights by waiting for other investors to demand the IPO.
- Piggyback registration is a way to sell shares in an initial public offering (IPO).
- Investors who rely on piggyback registration are dependent on other investors’ demand registration rights; they cannot force an IPO to occur.
- The primary disadvantages of piggyback registration are that underwriters frequently view it as a lower priority and that it gives them no control over when an IPO occurs.
What Is a Piggyback Mortgage Loan, And How Does It Work?
FAQ
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What are the best piggyback loan options?
A loan with a 75/15/10 split is another popular piggyback loan option. In this case, a first mortgage represents 75% of the home’s value, while a home equity loan accounts for another 15%. And like the 80/10/10 split, the remaining 10% is the down payment. For example, a $300,000 75/15/10 loan would break down like this:
What is a piggyback mortgage?
A piggyback loan combines two mortgages for the purpose of buying or refinancing a home. Borrowers often use piggyback mortgages to avoid paying private mortgage insurance on a conventional loan when putting down less than 20%. They can also leverage piggyback loans to reduce their down payment or buy a higher-priced home.
What is a piggyback loan strategy?
For example, say you want to buy a home for $200,000 and you only have $20,000 saved. If you use the piggyback loan strategy, you would take out a mortgage for $160,000 (80%). Then, you would take out a piggyback loan for another $20,000 (10%). Finally, you’d pay the remaining $20,000 (10%) as the down payment.
What are the benefits of a piggyback loan?
One of the most attractive benefits of a piggyback loan is the chance to avoid paying PMI. A piggyback loan allows you to pay as little as 5% or 10% in cash for a down payment. If a costly down payment prevents you from purchasing a home, a piggyback loan can give you a better chance.