Death spiral

A death spiral is a situation in which continuing declines in the market price of a company’s stock cause more investors holding convertible notes or preferred stock to convert their shares into the common stock of the issuer, resulting in the original owners of the business losing control over the entity. This situation is triggered by a provision in the convertible instruments, whereby the conversion ratio increases as the market price of the common stock declines. The situation is self-perpetuating, because early conversions to common stock dilute the earnings of the issuer, causing yet more conversions to common stock, which dilutes earnings further, and so forth.