Chaffee DLOM calculator
The Chaffee protective-put method prices a discount for lack of marketability as a Black-Scholes put option — the cost of insuring illiquid stock against a price drop before it can be sold. One input into a 409A valuation, not the whole thing.
DLOM
25.2%
Discounted value / share
$1
This is one input into a full 409A valuation, not a complete valuation on its own — it estimates the discount for lack of marketability given a marketable common-stock value that itself needs to come from a market, income, or OPM backsolve approach. Volatility is typically estimated from comparable public companies, not observed directly.
The formula
How a 409A uses this number
A 409A valuation starts from a marketable value for the company's common stock — typically derived from a recent financing round backsolved through an option-pricing model, a market approach using comparable companies, or an income approach. The DLOM is then applied to that marketable value to reflect the fact that, unlike publicly traded stock, private company shares can't be sold quickly.
This calculator produces that one discount, using the Chaffee protective-put method specifically. A complete 409A valuation report documents the underlying valuation method, the DLOM method and its inputs, and the qualifications of the appraiser — building that full report is a specialized engagement, typically handled by an independent valuation firm.
A worked example
A company's common stock has a marketable value of $1.00/share, with an estimated 55% volatility (from comparable public companies), a 2-year expected time to liquidity, a 4.2% risk-free rate, and no dividend yield. That produces a DLOM of roughly 25%, putting the discounted common-stock value at approximately $0.75/share — the figure that would actually get used for option strike pricing, before any further adjustments a full valuation might apply.
Why this is a lower bound
The Chaffee model prices a European put — one that can only be exercised at the end of the holding period, not at any point during it. Real illiquidity behaves more like an American-style option, since a holder's inability to sell exists throughout the entire period, not just at its end. An American-style option is worth at least as much as an equivalent European one, which is why appraisers generally treat the Chaffee result as a floor and frequently cross-check it against Finnerty's average-strike model or the Longstaff lookback model, which tend to produce higher discounts for the same inputs.
Estimating volatility
Publicly traded companies in the same industry, at a similar stage or size where possible.
Annualized volatility of daily or weekly returns over a period comparable to the time-to-liquidity assumption, typically 1-3 years of history.
A highly levered comparable can show inflated equity volatility relative to a private company with a simpler capital structure — worth adjusting for if the mismatch is significant.
Two independent appraisers using the same underlying company data can reasonably land on different volatility estimates, which is the single biggest source of disagreement in a Chaffee-model DLOM.
Frequently asked questions
A method, from David Chaffe's 1993 study, for estimating the discount for lack of marketability (DLOM) as the cost of a hypothetical at-the-money European put option — the price of insuring against the stock's value falling before it can be sold. It's priced using the Black-Scholes-Merton option pricing formula, with the stock price and strike price both set equal to the marketable value on the valuation date.
Volatility, time to liquidity, the risk-free rate, and a dividend yield (usually 0 for private company common stock). Because the stock and strike price are equal, the resulting put value divided by the stock price gives the DLOM directly as a percentage — the actual per-share dollar value cancels out of the discount calculation.
Since private stock doesn't trade, volatility is typically estimated from the historical volatility of comparable publicly traded companies in the same industry, sometimes adjusted for differences in size or capital structure. This is the input the Chaffee model is most sensitive to, and the main source of disagreement between two valuations of the same company.
No. It produces one component — the marketability discount — that gets applied to a common-stock value already derived from a market approach, income approach, or an option-pricing-model backsolve from a recent financing round. A full 409A valuation report combines that underlying valuation method with a DLOM like this one, plus documentation of every assumption.
Because it prices a European put — exercisable only at expiration — while real-world illiquidity resembles an American-style option that could be exercised at any point during the holding period, which would be worth more. This is why appraisers often note Chaffee's result as a lower bound and cross-check it against other models (Finnerty's average-strike model or the Longstaff lookback model) rather than relying on it in isolation.
Substantially — a longer expected holding period gives the stock more time to potentially fall in value before it can be sold, which increases the value of the hypothetical protective put and therefore the DLOM. Doubling the expected time to liquidity, holding volatility constant, meaningfully increases the resulting discount.
Commonly cited ranges run roughly 10-30%, depending heavily on volatility and time to liquidity — a company with lower volatility and a near-term expected exit sits toward the low end, while a highly volatile company with a longer expected holding period sits toward the high end. These are general reference points, not a substitute for calculating the specific inputs for a given company.
Calculate your own DLOM above, free, or see the business valuation calculator for the SDE-multiple approach used for small, owner-operated businesses.
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