Spotify just raised $1 billion with convertible debt after announcing $500MM in convertible debt a few months ago. In reaction, TechCrunch posted an article titled “Spotify raises $1 billion in debt with devilish terms to fight Apple Music“. While the writers at TechCrunch may think the terms of the convertible debt are “devilish”, this financing seems more angelic to me.
Key Terms Are As Follows:
– $1 billion in convertible debt from “TPG, Dragoneer, and clients of Goldman Sachs“
– 20% discount to IPO price
If no IPO within the next year, discount goes up 2.5% every extra six months
– 5% annual interest on the debt
Plus 1% more every six months up to a total of 10%
– Note holders subject to 90-day lockup after the IPO (90 days less than 180-day lockup period for Spotify’s employees and other investors)
While this deal has the potential to hurt early investors (including employees and other shareholders), it is only a problem if Spotify (and thus the IPO) doesn’t perform well. In my opinion, that is the only real negative of this deal.
As I’ve discussed in previous posts, its hard out there for unicorns (especially those, like Pebble, competing with well-funded tech giants). So why is this a good deal?
Why This Is A Good Deal For Spotify:
– Comparatively, Terms Are Decent: While the terms may appear rich to some, they are not so bad considering the ratchets, liquidation preferences, and other anti-dilution type covenants rampant among late stage unicorn financings. Additionally, more traditional financing consist of locked in valuations providing substantial upside in addition to downside protections.
– VCs Are Nervous: Traditional VCs have become cautious of unicorns as exit options are limited (slow IPO market), firms write down the value of their unicorn holdings, and unicorns begin to fail or suffer down rounds.
– Competition Is Fierce: Competition has drastically increased and, like Pepple, Spotify is now competing with Apple and other well-funded players.
– Valuation Determined In Future: In a difficult environment for unicorn financing, Spotify can maintain its valuation while raising significant capital all priced in the future when the company and or markets are (hopefully) in better condition.
If Spotify plans on performing well, this deal isn’t “devilish”! But, if Spotify plans on struggling to grow and compete then this deal will be bad for Spotify but, at that point, they will have bigger problems than convertible debt.
I should also point out that, “while there were reports in January they were looking to raise $500 million via convertible debt it’s not clear whether that amount was raised, or the $1 billion we are seeing today is the result of those attempts“. At the time, the terms on the $500MM (leaked by a Swedish newspaper) outlined a 17.5% discount and 4.5% annual interest compared to 20% and 5% respectively for this $1 billion round.
What do you think? Is this a good deal for Spotify? Does Spotify have any other options? Will Spotify win the music streaming wars?
About Ben Kotch:
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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