Spotify is about to close on a $1 billion deal that would double the amount of financing the music-streaming company has raised since its founding a decade ago, people briefed on the matter said Tuesday.
The money comes in the form of convertible debt, which allows Spotify’s investors to change their securities into equity at a future date, said the people, who spoke on the condition of anonymity because the deal was not yet public.
By using convertible debt, Spotify obtains the funds, without needing to change its valuation. The terms of the debt, however, may put pressure on the company to go public sooner. The company had an equity value of $8.4 billion last year.
Funds associated with the private equity firm TPG as well as the investment firm Dragoneer put in $750 million of the $1 billion, with the rest coming from other institutional investors, the people said. The transaction, which was placed by Goldman Sachs, is expected to close on Friday, they said.
News of the deal was reported earlier by The Wall Street Journal.
The terms give the investors the ability to convert to equity at a discount to an initial public offering price, two of the people briefed on the matter said. The discount increases if Spotify waits longer than a year to do so, they said. The coupon payment on the debt would also continue to rise over time, the people said.
The deal is similar to the one that Goldman Sachs arranged for Uber in January 2015. The ride-hailing company raised $1.6 billion in convertible debt. Should the company not go public within a certain time, the interest rate on those securities would climb.
TPG Special Situations Partners, an $18 billion fund within TPG that does transactions other than leveraged buyouts, participated in the deal, as did TPG Growth, which has invested in other start-ups like Uber and Airbnb.
Spotify may use the funds for acquisitions, investments and international expansion, the people said.
As consumers have turned from CDs and downloads to streaming, Spotify has developed a powerful position in the music industry, helping albums by young stars like Drake, Justin Bieber and Ed Sheeran reach high levels on the charts. The service has amassed 30 million paying users, far more than any other similar outlet.
But Spotify has been challenged by Apple, which introduced a competing service, Apple Music, last year, as well as by a growing array of new streaming outlets. YouTube also introduced a paid version last year, and Pandora, which dominates Internet radio with more than 80 million listeners, is negotiating with record companies to enter the on-demand market alongside Spotify, Apple Music, Tidal and Rhapsody.
Spotify, which has both free and paid versions, has also found itself on the defensive as record companies have withheld major new releases for brief periods to try to increase sales on just paid services, which tend to pay higher royalty rates. Lately, new albums by Gwen Stefani, Future and the 1975 have been withheld from Spotify in their opening weeks.
For its music, Spotify depends on licensing deals with music companies. It does not have long-term contracts for two of its suppliers. Universal and Warner Music, two of the largest record companies, have had “month to month” licensing deals with Spotify for some time, according to two people with knowledge of those deals, which puts Spotify at risk of facing stricter licensing terms in the future, or even, potentially, losing that content.
But as Spotify has grown more powerful, the labels and artists have come to need it as much as it needs the music companies.