Education
Discount for Lack of Marketability: The 409A Adjustment That Sets Your Strike Price
DLOM is the discount that turns your allocated common stock value into a 409A strike price. Here's how appraisers size it, the models used, and why it moves.
By 409.AI Team - 2026-08-07
# Discount for Lack of Marketability: The 409A Adjustment That Sets Your Strike Price
Every 409A valuation ends with a number smaller than founders expect. You raised at a $40M post-money, the appraiser hands back a common share value that implies a fraction of the preferred price, and somewhere in the report is a line item doing most of that work: the discount for lack of marketability, or DLOM.
DLOM is one of the least understood adjustments in a startup valuation, and one of the most consequential. It's the difference between a strike price your employees can actually afford and one that guts the value of their options. Understanding how appraisers size it tells you a lot about whether your 409A is defensible, and whether the strike price on your next grant will hold up if the IRS ever asks.
What DLOM actually measures
Public stock is liquid. If you own a share of a listed company, you can sell it this afternoon at a quoted price with a known, tiny transaction cost. Private stock is the opposite. You can't post it on an exchange, most secondaries need company and investor approval, and a buyer may take months to find. That illiquidity has a real economic cost, and DLOM is the appraiser's estimate of it.
The concept is intuitive. Two shares represent identical claims on the same company's cash flows. One trades freely; the other can't be sold for years. A rational buyer pays less for the one they can't exit. DLOM quantifies "less" as a percentage haircut applied to the value of your common stock.
This is a separate idea from the difference between preferred and common. Preferred shares carry liquidation preferences, dividends, and control rights that common shares don't, and the [option-pricing and PWERM allocation methods](https://409.ai/articles/409a-allocation-methods-opm-pwerm-backsolve) already strip that premium out before DLOM enters the picture. DLOM comes last. It's applied to the common value after allocation, as the final adjustment for the fact that common stock in a private company simply cannot be sold on demand. It's a big part of [why your 409A lands below your post-money valuation](https://409.ai/articles/why-is-your-409a-valuation-lower-than-post-money-valuation).
How appraisers actually estimate it
There's no single formula, and that's the point. A credible 409A cross-checks more than one method and lands on a supportable number rather than picking a round figure. The IRS itself catalogued the accepted approaches in its 2009 [Discount for Lack of Marketability Job Aid for IRS Valuation Professionals](https://www.irs.gov/pub/irs-lbi/dlom.pdf), which remains the reference examiners reach for. The methods fall into two camps.
Empirical studies
The first camp looks at real market data for how much illiquidity costs.
Restricted stock studies compare the price of a public company's freely traded shares to the price of its restricted shares, which can't be sold for a set holding period under SEC Rule 144. The gap between the two is a direct market reading of what illiquidity is worth. Older studies from the 1970s and 1980s clustered around a 30 to 35 percent average discount. That average drifted lower after the SEC cut the Rule 144 holding period for reporting companies to six months in 2008, which matters because a shorter lockup means a smaller discount.
Pre-IPO studies take a different tack. They compare the price of private transactions in a company's stock to the price that same stock fetched a short time later at IPO. Because these capture deeply illiquid, early-stage positions, they tend to produce higher discounts than restricted stock studies, often in the 30 to 50 percent range or beyond.
Option-pricing models
The second camp treats illiquidity as a financial option. If you hold a share you can't sell, you've effectively given up the ability to lock in today's price. The cost of buying that protection back is a clean proxy for the discount.
The Chaffe model, published in 1993, prices a European put option using Black-Scholes and takes the put's cost as a percentage of the share price. Buy a put and you've guaranteed yourself the right to sell at today's price no matter what happens during the illiquid period. What that insurance costs is what marketability is worth.
The Finnerty model, refined in 2012, is the one you'll see most often in modern 409A reports. Finnerty's insight was that an average-strike Asian put fits the marketability problem better than Chaffe's European put, because it doesn't assume the holder can perfectly time a sale at the single best moment. The model's main inputs are volatility and the expected holding period until a liquidity event, which is exactly the kind of company-specific data a good appraiser already builds into the analysis.
The two camps check each other. Empirical studies ground the estimate in observed market behavior; option models tie it to your company's own volatility and time to liquidity. When they roughly agree, the number is defensible.
The company-specific adjustment
A benchmark study gives an appraiser a starting range. Getting from that range to your company's number takes judgment, and courts have said as much. In *Mandelbaum v. Commissioner* (1995), the Tax Court laid out a set of factors that valuation professionals still work through today, often called the Mandelbaum factors. They include:
- How close the company is to a liquidity event like an IPO or acquisition
- Whether any dividends are being paid
- The financial strength and profitability of the business
- Any transfer restrictions in the company's charter or shareholder agreements
- The size of the block being valued and how much control it carries
- Whether there's any secondary market activity in the stock
These push the discount up or down from the study baseline. A profitable, late-stage company with an active tender program and a visible IPO path sits at the low end. A pre-revenue seed company with locked-up shares and no buyers sits at the high end.
What that looks like in practice
The ranges track a company's stage closely. Early-stage startups, where a liquidity event is years away and volatility is high, commonly see DLOMs in the 30 to 45 percent range. Mid-stage companies with real revenue and a clearer path often land somewhere between 20 and 30 percent. Late-stage, pre-IPO companies can compress into the low teens.
Consider a worked example. Say the [allocation step](https://409.ai/articles/inside-the-409a-valuation-process) of your 409A produces a marketable common value of $2.00 per share. Apply a 35 percent DLOM for an early-stage company and the strike price becomes $1.30. Now imagine that same company two years later, approaching an IPO, with the discount down to 12 percent. On the same $2.00 marketable value, the strike lands at $1.76. Same underlying value, very different strike, driven almost entirely by how illiquid the stock is at each point in time.
That's why the discount shrinks as you mature. The closer a real exit gets, the less illiquidity costs, and the more your common stock converges toward its marketable value. It's also why a fresh secondary market can move the number.
The 2026 liquidity wrinkle
The traditional assumption behind a large DLOM is that private shares are effectively frozen until an exit. That assumption is weaker than it used to be. Secondary platforms, structured tender offers, and a broader base of accredited buyers have created partial liquidity for shares in many late-stage private companies well before any IPO.
For your 409A, that cuts the discount. When employees and early holders can actually sell some stock through a [company-run tender offer](https://409.ai/articles/tender-offers-secondary-sales-409a-valuation), the marketability argument weakens, and appraisers respond by lowering DLOM, sometimes sharply. The flip side is that active secondary trading can also supply direct pricing evidence for your common stock, which feeds the [market approach](https://409.ai/articles/market-approach-409a-valuation) and can raise the marketable value before any discount is even applied. Both effects push the strike price up. A live secondary market is one of the clearest signals that your next 409A will come back higher than your last.
Why the number is worth scrutinizing
DLOM is where a 409A is most vulnerable to challenge and most open to judgment. A discount that's too aggressive produces a strike price low enough to look like a gift, which is exactly the kind of [cheap stock the SEC and IRS second-guess](https://409.ai/articles/cheap-stock-pre-ipo-409a-sec-option-grants) when a company later goes public and restates. A discount that's too conservative hands your employees a strike price higher than it needs to be, quietly shrinking the value of their equity.
The safe harbor that makes a [409A valuation](https://409.ai/articles/what-is-a-409a-valuation-a-comprehensive-guide) defensible only holds if the whole analysis was reasonable, and DLOM is a big piece of "reasonable." When you read your next report, don't skip past it. Look for a stated method or two, a holding-period assumption that matches your actual runway to a liquidity event, and a company-specific rationale rather than a round number pulled from the air. If the report leans on a single 30 percent figure with no support, that's worth a question. The discount isn't a rounding detail. It's the number that decides what your team pays to own a piece of what you're building.