When a startup raises money, the funds usually go to the company in exchange for newly issued shares. This is a primary transaction.
A secondary share sale works differently. An existing shareholder sells some of their shares to another buyer, and the proceeds go to the selling shareholder rather than the company.
For startup employees, this can create an opportunity to turn some of their equity into cash before an IPO or acquisition. A founder might sell a portion of their holding, an early investor might reduce their stake, or eligible employees might be invited to sell some shares as part of a company-approved transaction.
Secondary sales are becoming an important part of the conversation around startup equity because they offer a potential route to liquidity without requiring the entire company to be sold or listed.
The first step is understanding what the employee actually holds. An ESOP grant is not the same as owning shares.
Employees with stock options generally need to satisfy the applicable vesting conditions and exercise their options to acquire shares. Even after exercising, they may not be able to sell those shares immediately because of company restrictions, contractual terms or other applicable requirements.
For employees who already hold shares, participation in a secondary sale may be possible through a few different routes.
A company may organise a transaction that allows eligible employees to sell a portion of their shares to an incoming investor or another approved buyer.
The company may set eligibility criteria, determine how much employees can sell and coordinate the transaction. Employees should check whether participation is optional, what price is being offered and whether the transaction covers vested shares only.
An investor may want to buy shares from existing shareholders as part of a broader investment transaction. Depending on the deal structure and applicable restrictions, employees may be invited to participate.
However, an investor's interest in buying shares does not automatically mean every employee can sell. The buyer, company and relevant shareholders may need to agree on the terms and approvals.
In a tender offer, eligible shareholders are invited to sell a specified amount of their shares under defined conditions. A startup may facilitate such an arrangement when an investor or another buyer is willing to purchase existing shares.
These programmes can give employees a structured opportunity to sell part of their holdings while continuing to own the rest. Participation, pricing and the number of shares accepted depend on the transaction terms.
Imagine an employee who has exercised their ESOPs and holds 2,000 shares in a private startup. The company later facilitates a secondary transaction in which eligible employees can sell some of their shares at ₹500 each.
If the employee sells 400 shares, the gross sale proceeds would be ₹2 lakh before applicable taxes, transaction costs and other deductions. They would retain 1,600 shares, assuming the transaction is completed as described.
The employee has realised some value without selling their entire holding. But the transaction price does not guarantee that the remaining shares can be sold at the same price later. Their value and liquidity will depend on the company's performance, future transactions and the rights attached to the shares.
A secondary sale involves more than agreeing on a price. Employees should understand the restrictions that apply to their shares and the process required to complete a transfer.
For private companies, the Articles of Association may restrict share transfers and prescribe procedures that shareholders must follow. Shareholder agreements can also contain transfer restrictions, rights of first refusal or other conditions. Depending on the transaction, company approvals and properly executed transfer documentation may be required under applicable law.
Employees should clarify whether the proposed transaction is open to them, how the sale price has been determined, how many shares they can sell and whether any fees or deductions apply. They should also check whether the offer is conditional on other shareholders participating or on the wider investment transaction completing.
A secondary sale should not be treated as a guaranteed benefit of holding ESOPs. Some startups may facilitate employee liquidity, while others may not have a suitable buyer or may choose not to organise such a transaction.
Tax treatment is another important consideration.
For ESOPs, taxation can arise when shares are allotted following the exercise of options. When those shares are subsequently sold, capital gains tax may apply under the relevant rules. The computation generally considers the applicable cost of acquisition, sale consideration and holding period. The exact treatment depends on the employee's circumstances and the type of securities involved.
Employees should not assume that the tax on a secondary sale will be the same as the tax on salary or the tax treatment of an ESOP exercise. They should also distinguish between the cash received from a sale and the taxable gain.
The applicable provisions, exemptions and rates should be checked at the time of the transaction. A qualified tax adviser can help assess the employee's specific position before the sale is completed.
Secondary transactions can help startups address a practical challenge: employees may have a valuable equity holding but no clear route to turn it into cash.
A well-structured employee liquidity programme can give eligible employees an opportunity to realise part of their investment while continuing to participate in the company's future growth. It can also help founders and investors manage ownership transitions.
But the trade-offs need consideration. Selling shares changes the shareholder composition, and the transaction must be coordinated with existing rights, company documents and applicable legal requirements. Founders also need to communicate clearly so employees understand that a liquidity opportunity is conditional, not an automatic entitlement.
Before a secondary sale can be evaluated, a company needs a clear picture of its ownership structure. It should be able to identify existing shareholders, understand how grants and exercises have affected ownership, and maintain accurate records as transactions take place.
Vestd India helps businesses manage ESOPs, cap tables and shareholder records through one connected platform. Keeping equity and ownership information organised supports better visibility as companies grow, raise funding and manage changes to their capital structure.
The platform supports equity administration; the legal approvals, transaction terms and tax treatment of a particular secondary sale still need to be addressed separately.
For employees, secondary share sales can offer a way to realise some value from startup equity before a major exit. For founders, they can provide another mechanism for managing ownership as the business matures.
The opportunity depends on having shares that can be sold, a willing buyer, the necessary approvals and terms that work for the people involved.
Employees should understand what they hold, what they are being offered and what they would retain after selling. Equity may create the possibility of a financial return, but a secondary sale is only one possible route to liquidity, and not every startup will offer one.
Secondary sales start with clear records. Vestd helps Indian startups give employees an accurate view of their equity and keep ownership up to date after every transfer.
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