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Not sure why it's so devilish. They basically raised $1B in cash on a 20% discount, no valuation cap. Basically, they're agreeing with the investors that they c

by rdli 11y ago

Not sure why it's so devilish. They basically raised $1B in cash on a 20% discount, no valuation cap. Basically, they're agreeing with the investors that they can't figure out a valuation for the company -- so they're deferring that until an IPO and have the public market sets the valuation. There's a lot of bellyaching here about the dilution for the existing shareholders. But I don't see how that's any different from an equity raise -- you're still diluting. Now, the risk with convertible debt is that there's no valuation FLOOR so the company is betting on itself to execute -- and if they miss expectations, that's a problem. The different lockup period is a bit of a concern, but the reality is that no institutional investor can sell a 10% (or whatever) stake in a public company overnight. So they capture a little bit more upside but it's not that material in the scheme of things IMO.

bentlegen 11y ago
> the reality is that no institutional investor can sell a 10% (or whatever) stake in a public company overnight They can, however, sell much of it during the 3 month head start they will have over everyone else.
- twoodfin 11y ago
  Sure, but isn't this whole deal premised on the notion that if investors want to head for the exits 3 months after the IPO, Spotify (and its employee shareholders) are fucked anyway? I agree it has to have some diluting effect, but if this capital is the difference between a successful IPO and a failed one, I'm not sure how you argue it represents a loss of value to employees.
  - Retric 11y ago
    If 80+% of your assets are in just one company you don't control then you really should be heading for the exits. Google quickly hit 6x there IPO, but if you had say 5 million at IPO and nothing else then selling 1 million of that would have been a really good idea. Or at least getting a put option to sell near the IPO price. Granted, you must pay taxes ect. But taking 20% off the top is generally a really good idea.
    - dopamean 11y ago
      Who said 80% of any of the investors assets are in just one company?
      - AngrySkillzz 11y ago
        I think they are talking about employee shareholders.
      - hinkley 11y ago
        My first rodeo, my existing options were worth about $40k on buyout day. That's chump change, even counting inflation, but I was a kid so that more than doubled my assets. Everybody was pretty happy. Five months later we were all almost under water, and half our raises were more stock options (I don't know what kind of psychadelic drugs come up with that plan). Nobody was happy and productivity tanked. And still we were doing a better job than our new masters. By the end of the lockup period our options were worth 60% of the strike price. In the end I learned the hard way about a bizarre strategy for keeping your company going. First, have a high valuation. Second, find a small company with liquid assets. Third, buy out the company with a stock swap and only a little cash. And now you have more capital on hand so you can lie to your investors for a few extra months. Not that I'm bitter.
    - twoodfin 11y ago
      I agree. I'm not arguing that employees shouldn't cash out when they can. I'm saying that if investors as a whole are getting cold feet 3 months after the IPO, those employees were never likely to be able to recoup much value from their equity in the first place, regardless of whether these lenders get to dive off the sinking ship first.
iofj 11y ago
When you calculate what position this actually buys the banks, assuming Spotify doesn't go bust, this loan has a 30% interest rate for the first year. So if you calculate it out, it means the bank demanded to have their money back (at least in theory/balance sheet) in 8 months and 2 weeks. This likely allows the banks to actually take this risk (ie. defend it to their board/shareholders). On the other side this allows Spotify to say that they've gotten a "cheap" loan, and even that they've "avoided dilution", when in reality it's a very expensive loan that dilutes quite a bit (how much depends on the valuation at IPO, but at the "current valuation" of 8.5 billion it dilutes 16%. If the valuation is less or the IPO gets delayed it dilutes more, up to 100% at about $1.4b or lower valuation, at which point shareholders and employees lose everything they have invested in the company). It doesn't keep the 30% rate over time, but I bet that came at the cost that the bank also have some way to foreclose on the loan. Effectively to value of Spotify (money you get when buying the whole company) went down somewhere between 300 million and perhaps up to 600 million because of this deal. And that's ignoring the other loss shareholders get because of this deal, after all debt is senior to equity, there's the equity conversion and pre-selling, which is going to mean the stock price will go down a bit before any stockholder can sell.

by rdli 11y ago

bentlegen 11y ago

> the reality is that no institutional investor can sell a 10% (or whatever) stake in a public company overnight They can, however, sell much of it during the 3 month head start they will have over everyone else.

twoodfin 11y ago
Sure, but isn't this whole deal premised on the notion that if investors want to head for the exits 3 months after the IPO, Spotify (and its employee shareholders) are fucked anyway? I agree it has to have some diluting effect, but if this capital is the difference between a successful IPO and a failed one, I'm not sure how you argue it represents a loss of value to employees.
- Retric 11y ago
  If 80+% of your assets are in just one company you don't control then you really should be heading for the exits. Google quickly hit 6x there IPO, but if you had say 5 million at IPO and nothing else then selling 1 million of that would have been a really good idea. Or at least getting a put option to sell near the IPO price. Granted, you must pay taxes ect. But taking 20% off the top is generally a really good idea.
  - dopamean 11y ago
    Who said 80% of any of the investors assets are in just one company?
    - AngrySkillzz 11y ago
      I think they are talking about employee shareholders.
    - hinkley 11y ago
      My first rodeo, my existing options were worth about $40k on buyout day. That's chump change, even counting inflation, but I was a kid so that more than doubled my assets. Everybody was pretty happy. Five months later we were all almost under water, and half our raises were more stock options (I don't know what kind of psychadelic drugs come up with that plan). Nobody was happy and productivity tanked. And still we were doing a better job than our new masters. By the end of the lockup period our options were worth 60% of the strike price. In the end I learned the hard way about a bizarre strategy for keeping your company going. First, have a high valuation. Second, find a small company with liquid assets. Third, buy out the company with a stock swap and only a little cash. And now you have more capital on hand so you can lie to your investors for a few extra months. Not that I'm bitter.
  - twoodfin 11y ago
    I agree. I'm not arguing that employees shouldn't cash out when they can. I'm saying that if investors as a whole are getting cold feet 3 months after the IPO, those employees were never likely to be able to recoup much value from their equity in the first place, regardless of whether these lenders get to dive off the sinking ship first.

iofj 11y ago

When you calculate what position this actually buys the banks, assuming Spotify doesn't go bust, this loan has a 30% interest rate for the first year. So if you calculate it out, it means the bank demanded to have their money back (at least in theory/balance sheet) in 8 months and 2 weeks. This likely allows the banks to actually take this risk (ie. defend it to their board/shareholders). On the other side this allows Spotify to say that they've gotten a "cheap" loan, and even that they've "avoided dilution", when in reality it's a very expensive loan that dilutes quite a bit (how much depends on the valuation at IPO, but at the "current valuation" of 8.5 billion it dilutes 16%. If the valuation is less or the IPO gets delayed it dilutes more, up to 100% at about $1.4b or lower valuation, at which point shareholders and employees lose everything they have invested in the company). It doesn't keep the 30% rate over time, but I bet that came at the cost that the bank also have some way to foreclose on the loan. Effectively to value of Spotify (money you get when buying the whole company) went down somewhere between 300 million and perhaps up to 600 million because of this deal. And that's ignoring the other loss shareholders get because of this deal, after all debt is senior to equity, there's the equity conversion and pre-selling, which is going to mean the stock price will go down a bit before any stockholder can sell.