Death spiral financing
What is death spiral financing?
Death spiral financing is a movement where convertible financing is practiced to fund small cap companies. This can then be used against it in the marketplace, causing the stocks value to drop greatly and ultimately lead to the company’s eventual downfall.
Where have you heard about death spiral financing?
A lot of companies count on selling convertible debt to greater private investors to fund their projects and growth. This can then be converted into common stock of the delivering company, often at a large discount to the market value of the common stock.
What you need to know about death spiral financing.
Whilst undergoing the typical “death spiral” process, the party holding the convertible debt shorts the issuers common stock, which causes the stock price to fall rapidly. Whilst this is happening the debt holder changes some of the convertible debt into common shares, which then covers the holders short. The debt holder will then maintain his selling of the short alongside other share holders who are selling because of the rapidly falling price, further weakening the share and making it undesirable to new investors and possible new finances.
Find out more about death spiral financing.
If you are interested in death spiral financing, read our page on small cap companies.