Sometimes, investors will ask for warrants in addition to the preferred stock they are getting in the company. Warrants are similar to stock options, and give the investors the right to buy additional shares of preferred stock for a certain period of time at a certain price (usually the same price their paying for the current shares). They're typically a "deal sweetener" and are given to investors as an incentive to go through with the deal.

But, they also lower the effective valuation of a Company. They basically allow investors to get more equity in the company without taking on any additional risk. If the value of the company goes down, the investors aren't required to exercise the warrants or put more money in. If the value goes up, they get to buy into a company worth more money at the same price they did on the first round, basically making a quick positive return on the warrants.

The exercise price of warrants - i.e., the price investors pay to purchase the additional stock in the company - should be set at the same price-per-share as investors are paying for the preferred stock or slightly above if investors will agree to it. The company should never agree to "in the money" warrants - i.e, warrants that have an exercise price of less than the price-per-share of the preferred. In the money warrants give investors the incentive to immediately exercise the warrants and get more equity in the company at a discount. Not good for the founders.