Music streaming company Spotify has reportedly raised $1 billion of convertible debt from firms including TPG and Dragoneer, and the lenders are said to have worked in some advantageous terms. Not only will they convert the debt to equity at a 20% discount of the share price when Spotify IPOs but, if Spotify doesn’t IPO within a year, that discount will increase by 2.5% every six months that passes beyond that deadline.
The deal is also interesting because it involves such a late-stage company. Convertible debt is frequently used to finance early-stage startups, enabling founders to quickly raise money and delay having to value their company. This type of deal at such a late stage can be seen as another signal that the VC funding environment is not very welcoming right now, making it tough for Spotify to secure investors that would agree to increase its valuation from the $8.5 billion it garnered with a $526 million financing last year.
Of course, this could just be Spotify strategically prepping for an IPO. After all, clients of Goldman Sachs were involved in this deal as well. Their diligence through this round could help set up a much smoother public offering if and when that window opens for Spotify.