In a deal that will hurt in the short run but possibly help in the long term, Spotify has raised $1 billion in convertible debt, according to a report from the Wall Street Journal's Douglas MacMillan.

TPG and Dragoneer led the investment and were supported by clients of Goldman Sachs. The deal, which "comes with some strict guarantees," has already been signed, according to the report.

Spotify has to pay 5 percent annual interest, though that goes up by 1 percent each half year and caps out at 10 percent.

The debt can also be converted into equity with a 20 percent discount that goes up by 2.5 percent every six months Spotify doesn't go public. The discount is set at 20 percent for the first year.

Along with nailing down terms to encourage the Swedish company to make an IPO (Initial Public Offer) within the next year or so, TPG and Dragoneer only have to wait 90 days after the IPO to sell their converted shares of the company. Spotify's employees will have to wait twice as long to do so.

Spotify agreed to the tough terms of the deal because the competition in the market for streaming music continues to get tougher. While Jay-Z's Tidal just hit the 3-million mark, Apple Music has, in less than a year's time, drummed up 11 million paying users in its march to overtake Spotify.

Though Apple Music added 11 million paying subscribers, Spotify attracted about 10 million new customers over that time. It has climbed from a count of 20 million paying customers to 30 million, as revealed by Spotify CEO and founder Daniel Ek in a tweet.

But it's not just Apple that's giving Spotify a hard time. Pandora is retooling to better compete with Spotify and Apple Music, while SoundCloud has already done so.

With more than 175 million monthly users, SoundCloud just announced a new subscription service to help it better monetize the content from its 12 million creators. The $9.99 per month service will also include 125 million tracks, licensed and shared, in a model that's set to lay claim to even more potential Spotify customers.

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