Death spiral financing Definition
Death spiral financing occurs when a small company, in desperate need of money, takes an investor's cash, but with a caveat. That investor, at the time of their choosing, can claim some of the company's stock, usually at a fraction of the market value. That seller can then start claiming and selling the stock short. Because the company is small, this depresses the value of the stock, thus allowing the investor to claim and sell more stock.
The options to buy stock are known as "toxic" or "death spiral" convertibles.