If things get worse, then the warrants will become worth a lot less - maybe nothing. If you are worried about things getting worse, better to buy puts to hedge you investment in notes.
Anyways, I understand why LC may FEEL the need to do a dilutive deal with a hedge fund, but I ask the question again, is it really in such a dire situation? This is not a highly leveraged company that is nearing the brink of a Lehman-like death spiral moment. If fact, they have no debt whatsoever and a fairly large cash pile relative to mkt cap.
Also, note investors are fleeing now but why should we fear a permanent buyers strike? The returns have been good (not great) relative to other fixed income securities and the asset class has other nice attributes (low volatility, etc). Junk bonds, munis, etc have all faced buyers strikes in recent years but have bounced back (even stronger in the case of munis) when investors looked objectively at the risk-return and relative value attributes of these asset classes.
Instead of trying to temporarily spike originations by selling a piece of the "farm," I would rather see LC do something innovative on the retail investor side. After all, they are a FinTech company, but there hasn't been any Tech or innovation at LC in years, as far as I can tell. First I would reset investor expectations by telling them things will be bad for several quarters maybe. Then I would do a meaningful layoff to lower opex. Then I would try to roll out as quickly as possible new products that make it easier for retail, non-accredited investors to get exposure to retail notes. Maybe create an note ETF, make it easier to buy and sell notes in a secondary market, work with advisors (maybe robo) to get this product in front of different kinds of investors - millennials, retirees, etc. I'm sure all of these are hard to do from a regulatory, technology standpoint, but shouldn't we expect an innovative company to innovate.
Also they should leverage their board. Why have Larry Summers, Mary Meeker, John Mack and all these other luminaries and not use them to create partnerships, curry favor with regulators, etc. There is so much to do, but under RL's leadership all we got was an IPO and some very tenuous small bank relationships. Sorry for the rant.
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