Under the terms of the debt funding, Spotify pays 5% annual interest, adding 1% every six months for a total of up to 10%. Investors can convert their debt to equity at a 20% discount of Spotify's IPO (or presumably now a DPO) share price. If there is no public offering within a year, the discount at which they can eventually buy stock would increase 2.5% every extra six months.
This week's announcement that Spotify had cut a multi-year licensing deal with UMG, and the subsequent deals with other rightsholders that will certainly follow, paves the way for Spotify to become a public company. But instead of the traditional IPO, Spotify is seriously exploring taking a more unconventional approach.
Spotify founder and CEO Daniel Ek has often said that he is in no hurry to IPO. Now, comes word that EK and Company are a considering a path that would all but circumvent it.
Spotify is "seriously considering" a direct stock listing that would avoid the traditional IPO, reports the Wall Street Journal. The plan being explored would see Spotify make shares available as early as September on a U.S. exchange at a $10 billion valuation.
Avoiding a traditional IPO, does mean that Spotify would not raise the cash that comes with an IPO. But it allows Spotify to come the market faster, without expensive underwriters and the other costs of preparing for an IPO. It also means that the value of current stock held by founders, many employees, investors and the major labels would not been diluted by the addition of new shares.
Why The Rush To Go Public?
Making this possible is that Spotify is already a cash rich company; and terms that led to that funding may also be a reason that the music streamer wants to take the faster path of direct listing. As we've previously reported, Spotify raised $1 billion in debt funding early last year from TPG, Dragoneer and clients of Goldman Sachs. That put Spotify's total potential cash intake at $2.56 billion, but it came with some onerous terms if the company did not go public quickly.
In short, the speed to market of a direct stock offering could save Spotify tens of millions of dollars in interest and underwriting fees; while at the same time preserving stock value for earlier investors.
But the approach does not come without risk. "With market forces determining the share price from the outset, the company’s public debut could be more volatile and unpredictable," according to the Wall Street Journal. "Also missing would be the large blocks of stock underwriters typically allocate to investors they believe will hold the shares for the long term and promote trading stability."
That may explain why Spotify recently hired bankers to advise them on a traditional IPO as well, and could still choose to go that route.