What Is DLOM and Why Is It Required?
The Discount for Lack of Marketability is a reduction applied to the value of equity in a private company to account for the fact that those shares cannot be quickly converted to cash. A shareholder in Apple can sell their shares in seconds at a known price. A shareholder in a private startup may wait years before any liquidity event, and even then, there is no guarantee of price or timing.
Under IRS safe harbor methodology for 409A valuations, DLOM is not optional — it is a required component of the equity value allocation. An appraiser who omits DLOM without documented justification has not followed accepted appraisal practice.
DLOM Ranges by Stage
| Stage | DLOM Range | Rationale |
|---|---|---|
| Pre-Seed | 40–45% | No revenue, no clear liquidity path, 5–7+ year horizon |
| Seed | 35–40% | Early revenue, institutional capital, 4–6 year horizon |
| Post-Seed / Pre-Series A | 30–35% | Growth trajectory, 3–5 year horizon |
| Series A | 25–30% | Institutional backing, 3–4 year horizon |
| Series B | 20–25% | Clear growth trajectory, 2–3 year horizon |
| Series C | 15–20% | IPO candidacy, 1–2 year horizon |
| Growth / Pre-IPO | 10–15% | Active IPO preparation, months away |
How DLOM Is Calculated
Qualified appraisers use empirically supported methods, typically applying multiple approaches and weighting them:
- Restricted Stock Studies: Analyses the discount at which restricted (unregistered) shares of public companies trade vs. freely-traded equivalents. Management Planning Inc. (MPI) and FMV Opinions databases are commonly used. Typical discounts from studies: 20–35%.
- IPO Studies: Compares pre-IPO transaction prices to eventual IPO prices, measuring the discount for illiquidity during the holding period. Emory and Willamette Management studies are the primary references. Typical discounts: 30–50%.
- Longstaff Put Option Model: A mathematical model that prices the value of having the ability to sell the stock immediately (marketability) using option pricing theory. Produces a theoretical maximum DLOM.
- Asian Put Option / Finnerty Model: A variant of the put option approach that accounts for average holding periods rather than a fixed time.
For early-stage companies, empirical studies (restricted stock and IPO) tend to dominate. For later-stage companies approaching IPO, the put option models may be weighted more heavily to capture the specific characteristics of the company's liquidity timeline.
Why Auditors Focus on DLOM
DLOM is one of the most frequently challenged assumptions in Big 4 audit reviews of 409A valuations. Auditors scrutinise DLOM because:
- It is a significant driver of the final common stock FMV — a 5-percentage-point change in DLOM can meaningfully change the concluded value
- It is inherently subjective and methodologically complex
- It is visible in the financial statement disclosures (the assumed stock price feeds directly into ASC 718 Black-Scholes calculations)
- Auditors have internal benchmarks for DLOM by industry and stage, and will challenge outliers
When auditors question your DLOM, the response should include: the specific methodology used, data sources relied upon (study databases), sensitivity analysis showing the effect of different DLOM assumptions, and a documented rationale for why the applied DLOM is appropriate given the company's specific liquidity profile.