ESOP liquidity before an IPO: buybacks, secondaries and trusts in India

You can sell ESOP shares before an IPO only when the company creates a way to do it. The main routes in India are a company buyback, a secondary sale to investors, a recurring liquidity programme and an ESOP trust. Founders can also help employees with exercise costs, give longer exercise windows or use cash-settled awards such as phantom stock. The startups that do this well run liquidity on a predictable calendar, so employees know when their next chance to sell will come.

Can you sell ESOPs before an IPO?

Usually not on your own. Shares in a private Indian company cannot be sold freely. The company's articles of association and its shareholders' agreement often give existing investors a right of first refusal, or require board consent, before any transfer. Many companies also restrict sales to outside buyers. Some platforms list unlisted shares for sale, but a deal still needs the company's rules to allow it.

In practice, you can sell when the company runs a liquidity event:

• a buyback, where the company buys your shares;
• a secondary sale, where an investor buys them, usually during a funding round;
• a trust purchase, where the company's ESOP trust buys them.

Before you can sell shares, you normally need to exercise your options, which means paying the exercise price and the tax on the gain at exercise.

Can you sell ESOPs after you resign?

Yes, if you exercise your vested options within the exercise window after you leave and the company runs a liquidity event that includes former employees. Many do: Razorpay, Meesho, CoinDCX and BrowserStack all included former employees in recent programmes. If the window is short and no event is planned, you may have to choose between exercising, with tax due, and letting the options lapse. Ask the company about both before your last day.

Why ESOP liquidity matters before an IPO

ESOPs are a promise of future wealth. Until employees can sell, that wealth exists only on paper, and the longer the wait, the less the promise is worth to them.

• Retention. Early employees often hold the most valuable options. Without a chance to sell, some leave for jobs that pay more cash.
• Trust. A buyback or secondary sale is proof that the options have real value.
• Hiring. A record of buybacks gives candidates a reason to value the ESOPs in your offer.

India's IPO market has opened up. According to Business Standard, 2025 saw a record 18 startup IPOs, which together raised more than ₹41,000 crore. Urban Company, Lenskart, Groww, Pine Labs, PhysicsWallah and Meesho all listed that year. But most startups are still years from listing.

ESOP liquidity options at a glance

The routes below are set up by the company, so this part is mainly for founders and finance teams.

Caption: The main ESOP liquidity routes for unlisted Indian companies.

What is an ESOP buyback and how does it work?

An ESOP buyback is when a company buys back shares that employees got by exercising their options. In short, a company can spend at most a quarter of its paid-up capital and free reserves on a buyback, and must keep its debt in check. For a private company, Sections 68 to 70 of the Companies Act, 2013 set the detailed limits:

• The buyback cannot exceed 25% of paid-up capital plus free reserves.
• Up to 10% can be approved by the board. Above that, up to 25%, needs a special resolution of shareholders.
• After the buyback, the company's debt cannot be more than twice its paid-up capital and free reserves.
• The money must come from free reserves, the securities premium account or the proceeds of a fresh issue.
• A new buyback offer cannot be made within a year of the previous one closing.

The usual sequence runs like this:

1. The board sets the price and the size.
2. Shareholders approve it, if the size needs their approval.
3. Employees exercise their vested options.
4. The company makes the offer, and employees tender their shares.
5. The company pays and files the required forms.

Some companies instead pay employees cash for vested options that were never exercised. That route is less settled in company law, so take legal advice before you use it.

Secondary sales to investors

In a secondary sale, investors buy shares directly from employees, usually alongside a funding round. When many employees sell in one organised round, it is sometimes called a tender offer. The company does not spend its own cash. Legally it is an ordinary share transfer, but existing investors usually need to waive their right of first refusal, which is often the slowest step. If the buyer is a foreign investor, foreign exchange rules on pricing and filings apply.

Two examples:

• Razorpay ran a $75 million ESOP sale in May 2022, led by Lightspeed Venture Partners. 650 current and former employees could sell up to 30% of their vested shares.
• Urban Company ran a ₹203 crore secondary sale in May 2024 for 446 current and former employees. The buyers were Dharana Capital, Vy Capital and Prosus. It was the company's fifth such programme.

ESOP liquidity programmes in India

A single buyback helps once. A predictable calendar does more, because employees can plan around it.

Caption: Selected ESOP liquidity events by Indian startups, as reported by the companies or Indian business media.

Across the ecosystem, Inc42 counted ESOP buybacks worth about ₹1,448 crore by 23 startups in 2024. In 2025 it counted about ₹1,409 crore by 12 startups, covering more than 9,200 employees.

Flipkart's approach is worth noting: it tied the second window to business targets set by its board. That lets employees plan, and gives the company a clear test for each payout.

ESOP trusts and exercise loans

An ESOP trust holds shares for employees and can buy them back when employees want to sell, so it can be used again for each liquidity event. Section 67(3)(b) of the Companies Act, read with Rule 16, allows a company to fund such a trust. The trust uses the money to buy fully paid shares for employees, under a scheme approved by special resolution. Rule 16 caps that support at 5% of paid-up capital and free reserves, and shares of an unlisted company must be priced by a registered valuer.

Exercising options costs money twice: the exercise price and the tax on the gain. For a large grant, the tax can run into lakhs of rupees before any share is sold. Founders can help through:

• Exercise loans, from the company's trust or a lender, repaid from the sale. Zepto's board approved an interest-free loan of up to ₹700 crore to its ESOP trust in October 2025, to help employees exercise their vested options.
• Cashless exercise, where enough shares are sold at the time of exercise to cover the price and tax. This needs a buyer at that moment, such as the trust or an investor.
• The startup tax deferral. Employees of eligible startups with DPIIT recognition and an Inter-Ministerial Board certificate can defer the tax due at exercise.

Longer windows and phantom stock

A longer window to exercise after an employee leaves is not cash, but it removes a painful choice: pay a large tax bill now or lose the options. Meesho's scheme gives up to 10 years from the last working day.

Phantom stock and cash-settled stock appreciation rights pay employees the value of notional shares in cash, at set dates or events. They do not dilute shareholders and do not involve a share transfer. They are taxed as salary when paid, and the company carries them as a liability that changes with its value. They suit companies that want to reward a few key people without creating new shareholders.

How ESOP buybacks are taxed in India

ESOP tax in India works in two steps, and the Income-tax Act, 2025, in force from 1 April 2026, keeps the same structure.

1. At exercise. The difference between the fair market value on the exercise date and the exercise price is taxed as salary at your slab rate, and the employer deducts TDS.
2. At sale. The gain over the fair market value at exercise is a capital gain. For unlisted shares held for more than 24 months, long-term capital gains are taxed at 12.5%. Shares held for a shorter period are taxed at slab rates.

Buyback tax has changed twice since 2024

• Before 1 October 2024, the company paid the tax on a buyback.
• From 1 October 2024 to 31 March 2026, the shareholder was taxed on the full buyback amount as dividend income, at slab rates.
• From 1 April 2026, buyback proceeds are taxed as capital gains on the gain over cost. For shares you got through ESOPs, your cost is usually the fair market value on which you paid tax at exercise. Promoters pay an extra tax. In an unlisted company, a promoter includes anyone holding more than 10%, so ordinary ESOP holders are taxed at normal capital gains rates.

Check the date of any tax advice you read, because much of what is online describes an earlier rule.

Is a buyback of unexercised options taxed as salary?

A buyback of options that were never exercised is different, because no shares were ever issued. In July 2026, the Bengaluru bench of the Income Tax Appellate Tribunal ruled on a Flipkart employee whose vested but unexercised options were bought back. It held that the payment was a capital gain, not salary. The case concerned an earlier year under the old Act, and a tribunal ruling can be appealed, so take advice before relying on it.

Reporting an ESOP sale in your tax return

The tax at exercise shows up in your salary and Form 16, because your employer deducts TDS on it. The sale is reported separately as capital gains in your income tax return. Your cost is the fair market value at exercise, and the holding period runs from the date the shares were allotted to you. If you hold unlisted shares, the return may also ask for their details. A tax adviser can confirm which form and schedule apply to you.

What if the company never lists?

That depends on what happens instead.

• The company stays private. Your vested options keep their terms under the scheme. You can sell only in a buyback, secondary sale or trust purchase. If your exercise window after leaving is short, you may have to choose between exercising, with tax due, and losing the options.
• The company is sold. Your options may be taken over by the buyer, swapped for the buyer's options, or cashed out at a set price. Unvested options may vest faster if the scheme or the deal allows it. Investors with liquidation preferences are usually paid first, so in a low-value sale there may be little left for ordinary shareholders.
• The company shuts down. Options and ordinary shares usually end up worth nothing, because creditors and preference shareholders are paid first.

What happens to ESOPs after an IPO?

Once the company lists, your shares can be sold on the stock exchange. Pre-IPO shareholders usually face a six-month lock-in. SEBI's IPO rules exempt shares that employees, current or former, received under an ESOP scheme before the IPO, provided the company has made the required disclosures. Company trading windows and insider trading rules can still limit when you sell.

Founders get one extra rule. Since September 2025, SEBI lets founders who are named as promoters in IPO papers keep ESOPs granted a year or more before the company files its draft prospectus. Once named as promoters, they cannot receive new grants.

Companies preparing to list, such as PhonePe, Flipkart and Zepto, have kept running buybacks or exercise support. An IPO can take longer than planned, and employees should not have to wait for it.

How to plan an ESOP liquidity programme

1. Set a budget. Decide how much cash the company or its investors can commit, and how often.
2. Choose the route. Buyback, secondary sale or trust, based on your reserves, your investors and your next funding round.
3. Decide who is eligible. Current employees only, or former employees too. Including former employees, even with a smaller cap, builds goodwill with the people who helped build the company.
4. Cap the amount. Most programmes let each employee sell a share of their vested options, such as 5% or 30%, so they keep a stake in the upside.
5. Fix the price. Use a recent valuation, and explain how the price was set.
6. Plan for tax. Work out TDS on exercise, help employees with the cash to exercise if needed, and give them a clear note on tax at sale under the current rules.
7. Announce a calendar. Tell employees when the next window may open, and what it depends on.

This article is general information, not legal, tax or financial advice. Speak to a company secretary, lawyer and tax adviser before you plan a buyback or secondary sale, or before you sell your ESOPs.