It was assumed that Spotify would final go public in 2017 not only because the timing was right in its growth, but mostly because of pressure from investors to get their money back. Rumor has it that the company is considering delaying its IPO until 2018, and that could cause the company a world of financial hurt if MBW and Techcrunch has it right.
The company feels that the extra time would allow it look better financially on paper than it does now. Plus, since it’s still negotiating license renewals from the major labels, there’s a cost uncertainty that could potentially decrease its stock price.
That’s easier said than done, according to the article. Spotify raised around $1 billion last year from a number of investors, but the terms were harsh, especially if an IPO is delayed.
According to the sources, the company is paying a 5% interest rate on the investment, in addition to a 20% discount on shares should the company IPO. That’s all well and good, but the interest increases by 1% every six months that the company fails to go public. That’s not all; the discount on the IPO shares increase by 2.5% every extra six months after the first year.
What does this mean in real numbers? If Spotify delays its IPO until the beginning of 2018, it would cost the company another $115 million just in interest. Not only that, it will cost the company another $250 million in shares, or another 3% of the company as well.
Spotify is caught between a rock and hard place financially. If it goes public now, its share price will suffer because its balance sheet won’t look as good. If it delays the IPO until the balance sheet looks better, it will cost the company in terms of increased interest (which the IPO revenue will presumably cover) and losing additional equity in the company.
This is the stuff that financial engineers live for. The public just wants it cheaper. Artists, labels and publishers just want a bigger piece of the pie. The investors and insiders just want a big payday. In the end, who do you think wins?