Death spiral
A death spiral is an informal name for a loop where conversions of a market-priced convertible add shares, the supply coincides with a lower price, and the lower price yields more shares.
Last verifiedThe 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.
See it on DilutionScan
Companies DilutionScan covers, with the instruments read from their SEC filings. Open one to see each instrument and the filing it came from.
- GNSGenius Group Limited8 warrant series, 1 convertible, 1 ATM program, 3 shelf registrations and 2 completed offerings on file
- SMXSMX (Security Matters) Public Limited Company Ordinary Shares10 warrant series, 8 convertibles, 2 equity lines, 4 shelf registrations, 4 S-1 registrations and 2 completed offerings on file
- MLGOMicroAlgo, Inc. Ordinary Shares2 warrant series, 5 convertibles and 2 shelf registrations on file
- HOLOMicroCloud Hologram Inc. Ordinary Shares2 warrant series, 1 convertible, 3 shelf registrations and 2 completed offerings on file
Guides that use this term
- How to Trade Penny Stocks Without Getting DilutedA dilution-first guide to penny stocks. How new shares reach the tape, which SEC filings announce them, worked examples, and a 20-minute filing check.
- Toxic Convertible Notes: How Variable Pricing WorksToxic convertible notes explained: how variable conversion prices, VWAP discounts and lookback windows work, and what happens to share counts with no floor.
- The Reverse Split Dilution Cycle ExplainedHow reverse splits, resale registrations and convertible financings can repeat as a dilution cycle, with a typical timeline and a worked two-loop share count.
Related terms
Check any ticker for dilution
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Definition from the Signal8 Academy glossary. Educational content only. DilutionScan and Signal8 are not broker-dealers or investment advisers, and nothing here is a recommendation to buy or sell any security.