Last week Ronald Seaman (DLOM Inc.) published LEAPS and the DLOM, a new book that takes a closer look at LEAPS—or publicly traded put options—as proxies for determining the discount for lack of marketability (DLOM) on valuing privately held stocks.
“There are numerous definitions of DLOM, some described by valuation scholars and some by various courts,” Seaman writes, in an excerpt from his book. “All of the many definitions of the DLOM have four components in common:
a.) the ability to convert the interest into cash; b.) the time necessary to convert the interest into cash; c.) the cost or expense to do so; and d.) the price at conversion.“LEAPS provide market evidence of the ‘price at conversion’ component of the DLOM,” Seaman says. “That portion of the discount is often the largest portion of the total discount because of the price risk involved in any lengthy holding period.”