In the race to be the biggest and most powerful in the streaming game, having the most cash on hand is one of the major keys to success for aggressive growth and marketing schemes needed to signing up new customers and entering new markets. Spotify is competing in an increasingly crowded marketplace, including the Apple Music, backed by the second most valuable company in the world. According to a new report, it just raised raising $1 billion in convertible debt to try and remain the top dog in the streaming world.
First reported by the Wall Street Journal, the debt was raised by private equity firm TPG and hedge fund Dragoneer Investment Group, which also included clients of Goldman Sachs.
This convertible debt comes with its advantages and some specific terms that imply that an IPO is in the offing very soon. Raising debt instead of equity has advantages for Spotify because it doesn't require a company valuation at the time of investment and thus dilute existing stock when the company eventually does go public. The company was valued at $8.5 billion during its last major round in June 2015, so it doesn't have to be revalued with this new bit of investment.
However if Spotify doesn't perform over the next year, things could get ugly. TPG and Dragoneer get to convert their debt to equity at a 20 percent discount whenever Spotify does eventually declare its IPO. There is an incentive to do so in the next 12 months since that discount goes up 2.5 percent every six months Spotify doesn't IPO.
Spotify will pay 5 percent annual interest on their debt, above the average 3.3 percent on bank lending right now according to the World Bank. TPG and Dragoneer also get favorable terms for selling stock after an IPO with the ability to sell off stocks just 90 days after the company goes public, compared to the 180-day lockup period that is held to employees and other investors.
According to Tech Crunch, the money will be used for growth and marketing.
