Unlike venture capital funding, which involves equity and is therefore keyed to a company valuation, debt is represented by bonds which can be exchanged for equity at a future date. The deal rewards investors with discounted pricing in the event of a Spotify IPO, and the price gets even more favorable if the IPO is delayed beyond one year.
The initial discount is reportedly 20% off IPO pricing, with an additional 2.5% reduction for every six-month delay of the offering. Furthermore, the debt investors can sell their IPO shares after 90 days, which is half the holding period imposed on employees and non-lending institutional investors.
The investing groups include TPG, Dragoneer, and private clients of Goldman Sachs.
Spotify has long been rumored to be aiming for a public offering, but founder and chief executive Daniel Ek has never explicitly confirmed an IPO plan. Previous investment rounds have not been tied to a public offering — at least, not in public view.
This news culminates and verifies a rumor which surfaced on March 1, as reported here.
Spotify is the world’s leading music subscription service, with 30-million monthly paying members, and a total monthly listening audience approaching 100-million. Notwithstanding the company’s success, it is facing challenging competitive headwinds.
- Pandora, the leading Internet radio service which plays to over 80–million monthly listeners, is building an on-demand subscription which might threaten Spotify’s grip on that business model.
- Apple Music is already threatening, with a reported 11-million monthly subscribers after launching in mid-2015.
- Other subscription services like Rhapsody and Deezer hold slowly-growing but meaningful portions of market share.
- Google offers a powerful suite of online audio services including YouTube, which is the world’s largest music delivery platform.
- And SoundCloud, which serves an estimated 175-million users per month, yesterday launched its own subscription plan after locking in licensing deals with major labels.
All these companies are operating in a market where consumers are migrating from past-decade audio choices (CDs, broadcast radio, music downloads) to cloud-based music access and streaming. Within the promise of growing consumer awareness is a general industry assumption that only a limited number of global music services with comprehensive libraries can scale sufficiently to survive long-term.
