Death spiral refers to a feedback loop where each turn of bad news accelerates the next — common in toxic convertible structures and in startups where shrinking resources drive customer and talent losses.

How it works

In financing death spirals, convertible notes or equity lines convert at discounts to a trailing stock price. When the price drops, conversions issue more shares, diluting holders and pushing the price lower — triggering more conversions.

In operational death spirals, revenue misses force layoffs or product cuts, which hurt customer experience, increase churn, reduce sales confidence, and deepen cash shortfalls. Without a breaking intervention — new capital, pivot, or sale — the company spirals toward insolvency.

Venture contexts more often warn about spiral-like terms in public-company bridge facilities than in standard priced rounds, but heavy down-round bridges with full ratchets can mimic similar dynamics for common shareholders.

Recognizing early signals — accelerating logo churn after support cuts, or financing docs tied to floating conversion prices — helps boards act before options narrow.

Why it matters

• Founders: Avoid financing structures whose conversion math worsens as your metrics fall. Read variable conversion and reset clauses with counsel.
• Investors: Distressed and public crossover investors model spiral paths explicitly. Early intervention beats negotiating from insolvency.

Common mistake

Applying incremental fixes — small layoffs, minor pricing tweaks — without breaking the underlying loop. Spirals need capital, structural change, or an orderly exit.

Related ideas

See also default dead, convertible note resets, toxic financing, and restructuring.