Akio Kon | Bloomberg | Getty Images
Daniel Ek, chief executive officer and co-founder of Spotify AB.
The news that music streaming service Spotify will go public later this year or early next using the relatively uncommon method of a direct listing has everyone in the tech and finance communities talking.
Even the SEC is studying Spotify’s plan to skip a traditional IPO in favor of a direct public offering, or DPO.
The big questions on everyone’s minds are: Why? Will it work for Spotify? And what does this mean for other tech start-ups looking to go public?
Before diving in, it’s worth considering why a company goes public in the first place. There are three principal reasons. First and foremost, it’s a financing transaction. In an IPO a company sells newly issued shares to the public for cash and uses that money to run its business, develop new products, hire more people and pay off debt. In almost all cases, companies hire Wall Street underwriters to conduct the public offering by curating investors, building the book of orders, pricing the stock and trading it after the IPO.
Second, going public provides liquidity to the company’s stakeholders. Typically, venture capital investors in the company may sell some shares in the IPO or they may distribute shares to their fund investors, who can then sell or hold their stake. Company employees with stock or options also have a way to cash out, at least in part, either at the time of the IPO or more commonly after the traditional underwriter lock-up expires six months later.
Third, going public gives the company another form of currency to make acquisitions. Once public, it’s much easier for a company to use its own stock to acquire another company because the stock has a determined value.
Based on my conversations with various Wall Street bankers, the first rationale — raising money — doesn’t apply to Spotify, because it doesn’t look like the company will be selling any of its primary shares to raise cash, at least not for a while.