Convertible Note Dilution: Fixed vs Floating Explained

Direct answer: A convertible note is debt that turns into stock instead of getting paid back in cash. Fixed notes convert at a set price. Floating ("toxic") notes convert at a discount to the recent market price, so a falling stock forces the company to issue more shares for the same debt. That feeds a spiral. You'll find it disclosed in SEC 10-Q filings.

If you trade small-cap gappers, a floating convertible note is one of the nastier things that can sit under a chart. It quietly turns a falling price into an ever-growing share count. Below: how fixed and floating notes differ, why the floating kind gets called "toxic," and how to dig the terms out of the filings yourself instead of trusting a float number you can't see the source of.

What is a convertible note?

A convertible note is a loan to the company. The lender can convert it into new shares instead of getting paid back in cash. The company gets financing without laying out cash today. The lender gets equity upside, and in small-cap land, often a structural edge on top.

The whole game is the conversion price. That's how many shares the note turns into. That one term decides whether you're looking at a mild dilution event or a spiral.

Fixed vs floating: what's the difference?

Two broad flavors. The difference is everything.

• Fixed conversion price. The note converts at a set, pre-agreed price (say, $2.00/share). A $1,000,000 note becomes 500,000 new shares. Known number, capped. The dilution is real but you can predict it.
• Floating conversion price. The note converts at a discount to a recent market price. For example, 20% below the lowest closing price over the trailing 10 or 20 trading days. The conversion price isn't fixed. It floats down with the stock.

With a fixed note you do the math once and you're done. With a floating note, the math keeps moving against you every time the price drops.

Why is a floating convertible note called "toxic"?

Because of the feedback loop. Walk through it:

1. The stock falls.
2. Lower price means a lower conversion price. It's a discount to the market, remember.
3. Lower conversion price means the same debt now converts into more shares.
4. More shares hit the market as supply.
5. That supply pushes the price lower. Back to step 1.

That's the death spiral. Price down, more shares issued, more selling pressure, price down again. A $1,000,000 note that would've been 500,000 shares at $2.00 can balloon into millions of shares if the stock craters to pennies. The share count grows way faster than a trader watching only the chart would ever guess.

This is why floating converts are the classic engine behind a chart that just bleeds lower on a rising share count with no obvious news.

Where does convertible note dilution show up in SEC filings?

It's on the public record. You don't have to guess.

• 10-Q / 10-K. The notes to the financial statements describe the convertible debt: principal, conversion terms, whether the price is fixed or floating, the discount, and the lookback period. Primary source, start here.
• 8-K. Often announces a new financing or note issuance right when it happens.
• S-1 / S-3. The registration statement that registers the shares underlying the note for resale. A lender registering shares to sell is a tell.
• Prospectus (424B5). Details of the offering the note came from.

Phrases to hunt for in the 10-Q: "convertible notes," "conversion price," "variable conversion," "discount to market," plus a lookback window ("lowest trading price for the prior 20 trading days").

See it in the filings yourself

The FloatVerify way. Don't lean on one float number. Check the source.

1. Pull the company's filing list on EDGAR (or in FloatVerify, where it's already sourced and dated).
2. Open the latest 10-Q and search the notes for "convertible."
3. Read the conversion terms. Fixed price means capped dilution. A discount to a trailing market price means floating, potentially toxic.
4. Note the discount % and the lookback period. Deeper discount, longer lookback, more shares the lender gets as the price falls.
5. Compare shares outstanding across the two most recent filings. Count rising alongside a floating note? The spiral may already be running.

Most of the time the two sources line up. But when a float number is stale, this is where it splits: some float tools show a share count pulled from an older filing while a floating note is minting fresh shares as the price drops. In our experience a real contradiction like that is uncommon, on the order of a handful out of dozens of names. Still, when the numbers don't match, that mismatch is exactly what's worth a second look. It's why every figure in FloatVerify is sourced and dated, so you can see which filing it came from and how old it is.

Is a convertible note always bad for a stock?

Not by itself. This is data, not a verdict. Plenty of companies use plain fixed convertibles as ordinary financing, with predictable, capped dilution. The risk piles up in the floating structures, where the conversion price tracks the market down. What matters for a trader is awareness. Know whether a note is fixed or floating, how deep the discount runs, and that a falling price can mechanically manufacture new supply. The filing hands you the facts. What you do with them is your call.

FAQ

What's the difference between a fixed and floating convertible note? A fixed note converts at a set price, so the number of new shares is known in advance. A floating note converts at a discount to the recent market price, so the number of shares grows as the stock falls.

Why are floating convertibles called "toxic"? Because they create a feedback loop. A falling price lowers the conversion price, which issues more shares, which adds selling pressure, which lowers the price again. A dilution spiral.

Where do I find a company's convertible notes? In the notes to the financial statements in its SEC 10-Q or 10-K. Search for "convertible," "conversion price," and any "discount to market" or lookback language.

Does a convertible note change the float? Once the note converts, the new shares get issued and increase shares outstanding and, once freely tradable, the float. With a floating note, that increase can be much larger than an old filing implies.

Can I know in advance how many shares a floating note will create? Not precisely. It depends on future prices. The filing gives you the discount and lookback formula, but the final share count depends on where the stock trades when the lender converts.

FloatVerify shows float, dilution and cash burn on US small-cap gappers. Every figure sourced and dated, so you can see which filing it came from. Data you can check yourself. → floatverify.com