---
title: "Liquidity Discount"
url: "https://mahouse.world/glossary/liquidity-discount"
type: "glossary term"
topic: "Valuation"
author: "Ihor Vlasov"
reviewed: "2026-09-20"
published: "2026-08-10"
---

# Liquidity Discount

A liquidity discount is the reduction applied to the value of shares that cannot be readily sold — a private company's, a minority stake's, shares under a lock-up — against what identical shares would fetch in a liquid market. It is why a private fintech is valued below its listed comparables, why secondary sales price below the last round, and why a minority holder owns less than their percentage suggests.

**Also known as:** Discount for lack of marketability, DLOM, Illiquidity discount, Private company discount

## Key facts

- **Used at:** valuations of private companies from listed comparables; secondary sales of employee and investor shares; tax valuations of gifts and estates; fairness opinions on minority stakes; the pricing of shares under a lock-up
- **Binding:** no — a valuation judgement; tax authorities and courts have accepted ranges from restricted-stock and pre-IPO studies
- **Typical size:** 20–35% for a private company against listed comparables; 10–25% for shares under a lock-up or a large block; smaller for a company about to list, larger for a minority stake with no exit and no dividends
- **Typical evidence:** the discounts at which restricted shares of listed companies have traded against their unrestricted shares; the gap between pre-IPO private transactions and the IPO price; option-pricing models of the cost of a put over the holding period
- **Parties:** valuers, buyers of private shares, secondary funds, tax authorities, and the holders whose shares are worth less than the headline

## How a liquidity discount works in practice

A listed payments company trades at 12× EBITDA. A private one of similar quality is offered to a buyer at the same multiple; the buyer says no, because owning the private company's shares means no market to sell into, no price discovery, and a sale that takes six months and an adviser when it comes. It applies a discount — 25%, say, to 9× — for the illiquidity, on top of whatever discount the company's smaller size and thinner management deserve. The seller argues that a buyer acquiring the whole company can sell it whenever it likes, so the discount is for the holding period, not forever; the buyer argues that six months and a fee is the cost of that liquidity. They settle at 10×.

The discount is largest where the holder has the least control. A 5% holder in a private fintech, with no dividends, no right to force a sale and a shareholders' agreement that restricts transfers, holds a claim on an exit that may be years away: secondary buyers price that at 30–50% below the last round's price per share, and the difference is the liquidity discount plus the discount for being a minority. The same shares held by an investor with a drag-along and a board seat carry a smaller one.

Employees learn the discount when they try to sell: the company's post-money valuation is the price of preferred shares sold to investors with rights; their common shares, sold to a secondary fund with no rights and no exit, are the same company at a different price.

## Example

A valuer prices a 10% stake in a private payments company for a departing shareholder. Listed comparables imply €120m of equity value — €12m for the stake on a pro-rata basis. Adjustments: a 20% size and quality discount to the comparables' multiple (€96m, €9.6m pro rata); a 25% liquidity discount for a private company whose shares cannot be sold without the board's consent (€7.2m); and a 15% minority discount, because 10% controls nothing and receives no dividends (€6.1m). The company offers to buy the stake back at €6m; a secondary fund offers €5.5m and a two-year path to exit. The shareholder, who had valued the stake at €12m from the last round's headline, takes the company's offer — the discounts were the price of a private company's shares, not a negotiating position.

## Common mistakes

- Applying listed multiples to a private company without a liquidity discount, then wondering why no buyer pays them.
- Stacking size, liquidity and minority discounts without noticing they overlap.
- Employees valuing options at the last round's price per share as if they could sell at it.
- A liquidity discount on a 100% sale to a buyer who could list the company next year — the discount is for the holding period, and the buyer's is short.
- Tax valuations that ignore the studies, and are challenged on them.

## Related terms

- [Comparable Company Analysis](https://mahouse.world/glossary/comparable-company-analysis.md)
- [Control Premium](https://mahouse.world/glossary/control-premium.md)
- [Secondary Market](https://mahouse.world/glossary/secondary-market.md)
- [Cost of Equity](https://mahouse.world/glossary/cost-of-equity.md)
- [Post-Money Valuation](https://mahouse.world/glossary/post-money-valuation.md)
- [Unicorn](https://mahouse.world/glossary/unicorn.md)

— Ihor Vlasov, M&A FinTech Expert. Last reviewed 2026-09-20. https://mahouse.world/authors/ihor-vlasov