Estimation of Discount from Grant-Date Fair Value for Share-Based Awards with Post-Vest Holding Periods

Posted by:

In our previous blog post, we discussed comments by the SEC regarding the application of discounts to the grant-date fair value of share-based awards which include post-vest holding periods. In accordance with ASC 718-10-30-10, we consider the effect of the post-vest holding period on the grant-date fair value and estimate a discount. The academic literature presents a number of different models for the estimation of the discount, which depends upon the volatility of the company’s shares and the length of the post-vest holding period.

There are three different models which appear in the literature. Each one was originally developed to estimate the “discount for lack of marketability” or DLOM, which applies to the shares of non-public or thinly traded companies. The models are known as the Chaffe Model (1993), the Longstaff Model (1995) and the Finnerty Model (2002 and 2012). Each model uses the principles of option pricing theory to estimate the discount, though under differing assumptions.

MITI has developed software which embodies the procedures set forth in these three models. If your award incorporates a post-vest holding period restriction, we can estimate the appropriate grant-date fair value discount given the conditions. The software is also available for license. Please contact us for details.

April 6, 2016

About the Author:

Greg is a Derivative Valuation Consultant with Montgomery Investment Technology, Inc. He holds a BS from Carnegie-Mellon University and a PhD in Chemical Engineering with a concentration in Applied Mathematics from Princeton University. His experience spans management at both public and privately held companies, as well as teaching finance at the university level. Greg is a Chartered Alternative Investment Analyst (CAIA) and a Financial Risk Manager (FRM)