For many startup founders, employees and early investors, equity represents years of work and a stake in what the business could become. But there is a practical challenge: owning shares in a private company does not mean you can easily turn them into cash.
A company may grow, raise funding and increase its valuation without offering shareholders an immediate way to sell their holdings. An IPO or acquisition could provide an exit eventually, but neither is guaranteed to happen on a particular timeline.
Secondary share sales offer another possibility. They allow existing shareholders to sell some or all of their shares to a buyer, creating an opportunity for liquidity without requiring the company to go public.
A secondary share sale takes place when an existing shareholder sells shares to another buyer. Unlike a primary funding round, where a company issues new shares and receives the proceeds, a secondary transaction directs the sale proceeds to the selling shareholder.
For example, a startup may raise fresh capital from an investor while that investor also purchases shares from an existing shareholder. The primary investment funds the business, while the secondary component provides liquidity to the seller.
Secondary sales can involve founders, early investors, employees who hold shares or other existing shareholders. The participants and transaction structure depend on the deal.
The distinction is important because a secondary sale does not, by itself, raise new capital for the company. It changes who owns the existing shares.
Private company equity can remain illiquid for years. Founders may have a substantial portion of their personal wealth tied up in the business. Early investors may want to realise part of their investment, while employees who exercised stock options may be waiting for an opportunity to sell their shares.
A secondary transaction can help address these needs.
For founders, selling a portion of their holding may allow them to diversify their personal finances while remaining invested in the company. For early investors, it can provide a partial exit rather than requiring them to wait for a full company sale or public listing. For employees, an approved liquidity programme can offer an opportunity to realise some value from shares they already own.
However, liquidity is not automatic. A buyer must be willing to purchase the shares, the company and shareholders may need to approve the transaction, and the relevant legal and contractual conditions must be satisfied.
The process depends on the company's ownership documents and the proposed deal, but it generally involves several stages.
An existing shareholder and a potential buyer discuss the number of shares, the price and the conditions of the sale. The buyer might be an existing investor, a new investor or another eligible purchaser.
The agreed price may reflect the company's recent fundraising valuation, but it does not have to match it. The price for a secondary transaction can depend on the share class, the rights attached to the shares, demand from buyers and the specific terms of the deal.
Indian private companies commonly have provisions governing share transfers in their Articles of Association. Shareholder agreements may also include restrictions, rights of first refusal or other requirements that affect a proposed sale.
Before proceeding, the parties need to establish whether the shares can be transferred, who has approval rights and whether existing shareholders must be offered an opportunity to purchase them first.
The transaction must also comply with applicable company law and other relevant requirements. Where a non-resident buyer or seller is involved, foreign investment rules and pricing requirements may need particular attention.
Once the required conditions are met, the parties complete the transaction documents and applicable transfer formalities. The company must then ensure its statutory records and ownership information reflect the completed transaction in accordance with the relevant requirements.
Accurate records are particularly important when a company has multiple share classes, employee equity grants and several rounds of investment.
Imagine an early investor holds 10,000 shares in an Indian startup. A new investor offers to purchase 2,000 of those shares at ₹400 each, subject to the necessary approvals and transfer conditions.
If the sale completes, the seller receives ₹8 lakh in gross proceeds before applicable taxes and transaction costs. The seller retains 8,000 shares and continues to participate in the company's potential future growth.
The startup itself does not receive the ₹8 lakh from this secondary sale. The money goes to the selling shareholder.
The example also illustrates why a partial sale can be useful: the shareholder realises some value while retaining an interest in the business. The remaining shares may still be difficult to sell, and their future value is uncertain.
A secondary sale can affect the company's ownership structure, investor relationships and future fundraising discussions. Founders should understand these implications before committing to a transaction.
They need to review existing shareholder rights, confirm the approvals and documentation required, and consider how the sale may affect the balance of ownership among founders, investors and employees.
If employees are included in a liquidity programme, the company should explain the eligibility criteria, the number of shares that may be sold, the pricing process and any restrictions. Employees should not be led to believe that holding ESOPs guarantees a future sale opportunity.
Founders should also distinguish between options and shares. An ESOP generally gives an eligible employee the right to acquire shares subject to the scheme's terms. An unexercised option is not itself a share that can ordinarily be sold through a secondary share transfer.
Tax treatment depends on the transaction, the type of security and the parties involved.
For an employee who acquired shares through an ESOP, tax may arise when shares are allotted following exercise of the options. A subsequent sale may also trigger capital gains tax under the applicable rules.
The taxable amount and treatment depend on factors such as the acquisition cost, sale consideration, holding period and the employee's circumstances. Cross-border transactions may raise additional tax and regulatory considerations.
A shareholder should therefore assess the tax implications before completing a sale, rather than treating the gross sale proceeds as the amount they will ultimately retain. A qualified tax adviser can help determine the applicable treatment.
A secondary sale requires a clear view of who owns the company's shares and how that ownership changes when a transaction completes.
Vestd India helps businesses manage ESOPs, cap tables and shareholder records through one connected platform. Keeping grant information and ownership records organised gives founders and finance teams better visibility into their capital structure as the business grows and transactions take place.
This supports the administration behind ownership changes, while the transaction itself still requires the appropriate approvals, legal documentation and tax review.
An IPO is one possible route to liquidity, but it is not the only one. Secondary share sales can give existing shareholders an opportunity to realise some value while allowing a private company to remain private.
Their usefulness depends on having a willing buyer, clear transaction terms, the necessary approvals and an accurate understanding of the shares being sold.
For founders, investors and employees, the key is to treat secondary liquidity as a potential part of the company's ownership journey, not a guaranteed outcome. With clear documentation and careful planning, a secondary transaction can help shareholders manage their holdings while the business continues to grow.
Every secondary transaction depends on knowing exactly what is being sold. Vestd helps Indian startups keep clear, accurate share records throughout their ownership journey.
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