Page "Death spiral financing" Paragraph 1

Many small companies rely on selling convertible debt to large private investors ( see Private investment in public equity ) 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 his short position.

The debt holder continues to sell short and cover with converted stock which along with selling by other shareholders alarmed by the falling price continually weakens the share price making the shares unattractive to new investors and can severely limit the company ’ s ability to obtain new financing if the need arises.