Death spiral
Also called: death spiral financing, death spiral convertible, toxic spiral
Informal name for a feedback loop where conversions of a market-priced convertible add shares, the added supply coincides with a lower price, and the lower price produces more shares per conversion.
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The mechanism
The term describes a structure, not a company. It applies mainly to floorless convertibles and other securities with variable-price conversion. Each cycle looks like this:
- The holder converts part of the security at a discount to a recent low price.
- It sells the new shares, adding supply to the market.
- If the price falls, the next conversion price falls with it.
- A lower conversion price means more shares for the same dollar amount converted.
Because the conversion price has no floor, there is no fixed upper limit on how many shares can be issued except the company's authorized shares, the exchange's issuance caps, and the holder's ownership blocker.
Worked example
Hypothetical: Company X owes $2,000,000 on a note that converts at 75% of the lowest recent price. Each month the holder converts $250,000.
| Month | Lowest price | Conversion price | Shares issued |
|---|---|---|---|
| 1 | $1.00 | $0.75 | 333,333 |
| 2 | $0.70 | $0.525 | 476,190 |
| 3 | $0.45 | $0.3375 | 740,741 |
| 4 | $0.30 | $0.225 | 1,111,111 |
All figures are hypothetical.
The same $250,000 conversion created more than three times as many shares in month 4 as in month 1.
What it is not
Price declines after conversions have many possible causes, and not every variable-price financing follows this path. The term describes how the arithmetic can compound; it is not a prediction for any particular security. Companies caught in the loop often turn to a reverse split or an authorized share increase to keep issuing.
How to spot it
Look for repeated conversion notices or rising share counts in 10-Qs, proxy proposals to increase authorized shares, and note terms with "lowest" price lookbacks and no floor. See Toxic convertibles.
Related terms
Guides that use this term
Toxic financing · 6 min read
Toxic Convertibles Explained, From Variable Conversion Prices to No Floor
How variable-price convertible notes work, why a discount to VWAP and a lookback window matter, and what happens to share counts when there is no floor.
Toxic financing · 6 min read
The Reverse Split Dilution Cycle: Split, Register, Convert, Repeat
How reverse splits, resale registrations and convertible financings can repeat in a cycle, with a timeline and a worked share-count example.