Death spiral financing is a process in which convertible financing used to fund primarily small cap companies can be used against it in the marketplace to cause the company’s stock to fall dramatically, which can lead to the company’s ultimate downfall.

Many small companies rely on selling convertible debt to large private investors to fund their operations and growth. This convertible debt, often convertible preferred stock or convertible debentures, can be converted to the common stock of the issuing company often at steep discounts to the market value of the common stock. Under the typical “death spiral” scenario, the holder of the convertible debt initially shorts the issuer’s common stock, which often causes the stock price to decline, at which time the debt holder converts some of the convertible debt to common shares with which he then covers the debt holder's short position. The debt holder continues to sell short and cover with converted stock,