What is a discount for lack of marketability (DLOM)? Definition, how it works and examples
Why a private share is worth less than an identical listed one — how appraisers size the discount for not being able to sell, and where it shows up in a 409A.
The short answer
What is DLOM? A discount for lack of marketability is the percentage taken off the value of a share or ownership interest because it cannot be sold quickly for cash at a known price — unlike an identical share that trades on an exchange. It is how an appraiser turns a “marketable” value into the value of a private holding. For a private-company employee the discount is part of why the 409A price behind an option strike sits below what investors paid.
What is DLOM in valuation?
Valuation defines marketability as “the ability to quickly convert property to cash at minimal cost”. Of two identical interests, buyers pay more for the one they can sell fastest without losing value; over the months a private sale takes, the price can move, and a buyer wants paying for that risk. The discount for lack of marketability is that payment, expressed as a percentage. It is applied at a specific step. The appraiser first reaches a value on a marketable basis — from comparable listed companies, say, or from a recent round. If that step already reflects illiquidity, no DLOM is due.
What is DLOM in finance, and where does it show up?
409A valuations The regulation lists “discounts for lack of marketability” among the factors of a reasonable method. After allocating value across the share classes, the appraiser discounts common for the years to an exit. See 409A valuation. Estate and gift tax Fair market value is the price between a willing buyer and a willing seller, neither under compulsion. A gifted or inherited private stake is valued as if sold to that hypothetical buyer — who would demand a discount. This is where most DLOM disputes with the IRS arise.
How is DLOM estimated? Restricted stock, pre-IPO and put-option models
No method is prescribed. The IRS’s 2009 job aid for its own valuation staff reviews the main families and is explicit that it is not an official position and sets no bright lines. The ones a reader will meet: The option models share a premise: an investor who could sell freely would not need insurance against a falling price during the lock-in, so the cost of that insurance approximates the discount. The inputs that matter are the expected time until the holding can be sold and the volatility of the business.
A worked DLOM example for private common stock
An appraiser has allocated a company’s equity across its share classes and reached $20.00 per common share on a marketable basis. Common cannot be sold until a sale or IPO. Using a protective put — Black-Scholes, strike equal to the $20.00 value, a 4% risk-free rate — the discount depends on two judgements: how long until liquidity and how volatile the business is. Moving the expected exit from one year to three takes the value from $15.76 to $13.60; lowering volatility from 60% to 40% at two years adds about two dollars.
The rules behind DLOM, as of October 2026
Common mistakes with DLOM
Quoting a study average as the answer The IRS expects the analyst to get behind the data, not take a summary statistic. Discounting twice If the marketable value already reflects illiquidity, a further DLOM double-counts. Blending DLOM and DLOC They measure different things and are applied in sequence. Ignoring the expected exit A company that has filed for an IPO deserves a shorter term than one with no plan. Reading a 409A discount as a market price It is a tax valuation of common, not what a secondary buyer will pay.
The terms this page uses
Marketability The ability to convert an interest to cash quickly at minimal cost. DLOM The percentage deducted from a marketable value to reflect that the interest cannot be sold readily. DLOC Discount for lack of control: a deduction for a minority holder’s inability to direct the company, applied before DLOM. Restricted stock Unregistered shares of a listed company that cannot be resold until a Rule 144 holding period passes. Protective put An option to sell at a set price; its cost is used as a proxy for the marketability discount.
Questions about DLOM
What is a typical DLOM? There is no standard figure. Restricted stock studies reviewed by the IRS centre around 31%–33%, pre-IPO studies higher, and option models give anything from the teens to over 40% depending on time and volatility. The right number depends on the holding and the facts. What is the difference between DLOM and DLOC? DLOC prices the lack of control of a minority holder; DLOM prices the inability to sell. A minority stake in a private company may carry both, applied one after the other, never merged. Does the IRS accept DLOM?
What is a typical DLOM?
There is no standard figure. Restricted stock studies reviewed by the IRS centre around 31%–33%, pre-IPO studies higher, and option models give anything from the teens to over 40% depending on time and volatility. The right number depends on the holding and the facts.
What is the difference between DLOM and DLOC?
DLOC prices the lack of control of a minority holder; DLOM prices the inability to sell. A minority stake in a private company may carry both, applied one after the other, never merged.
Does the IRS accept DLOM?
Yes, as a concept — the 409A regulation names it and the courts apply it. What the IRS challenges is the size and the support for it, which is why its staff have a job aid on the subject.
Does DLOM shrink as an IPO approaches?
Usually. A shorter expected time to liquidity lowers the discount in every option model, and an IPO on file shortens it. After listing and the lock-up, the shares are marketable and no DLOM applies.
Where the figures on this page come from
Figures and rules were last verified on 2 October 2026. Study averages are quoted from the IRS DLOM job aid of 25 September 2009, which is reference material, not an IRS position. The worked example is our own illustrative calculation.