Spotify (the Swedish music streaming unicorn) just raised $500 million through convertible notes that “would turn into discounted shares in the company were it to go public“. Those in the micro-cap space are very familiar with notes that convert into stock at a discount and many think these types of notes are exclusive to the micro-cap space. Spotify is just another example of the prevalence of discounted convertible notes in many areas of corporate finance.
The sated conversion price is a 17.5% discount to market. Whats interesting is that, the 17.5% conversion discount is only applicable if the company goes public within one year of issuance. For every six months (after the first year) Spotify waits to IPO, 2.5% in additional discount is added to the initial 17.5% discount.
It seems like Spotify is using this offering to raise capital more like a public company and less like a private company. Perhaps the company anticipates a strong IPO and/or strong growth in the coming months and has decided to leverage this optimistic view of the future with this “future priced” offering.
Spotify has not set an official IPO date. The slow down in IPOs (January 2016 saw not one IPO) and trouble with unicorn IPOs, as a large number of potentially overvalued unicorns rush for the door, has me a bit surprised Spotify opted to tap this type of financing. A Swedish newspaper reports that Spotify is eyeing joint listing in Stockholm and the U.S. Based on the growing discount feature of the convertible note, I have a feeling we will see a Spotify IPO relatively soon.
Another sign (and very interesting on its own) that Spotify may be headed for an IPO in the near future is Warner Music Group CEO Stephen Cooper’s comments to investors on February 4th. Warner owns a 2-3% stake in Spotify and Mr. Copper stated “in the event we do receive cash proceeds from the sale of these equity stakes, we will also share this revenue with our artists”.
Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.
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