Selling Shares Before an Exit: How Secondary Sales Work for Founders, Angels and ESOP Holders in India, Priced, Taxed and Documented
By the Alphamark Venture Partners teamPublished 22 October 20265 min read
Angels want out, employees want cash for options, founders want some liquidity. How secondaries are priced in Indian rounds, taxed after April 2026, and handled under FEMA and demat rules.
The short answer
A secondary is a sale of existing shares, so the money goes to the seller, not the company. In Indian rounds secondaries now serve three purposes: buying out early angels to clean the cap table, partial liquidity for founders, and ESOP liquidity through tenders or company buybacks. They usually price at a discount to the primary round, which lowers the new investor's blended entry price. Sellers pay capital gains tax (12.5% on unlisted shares held over 24 months); buyers can be taxed if they pay less than fair market value under the Income-tax Rules, which for unquoted equity is largely book-value based. FEMA sets a price floor when a resident sells to a non-resident, and non-small private companies can only transfer shares in demat form.
Who this is for: Founders running a Series A or later round with early angels on the cap table, founders considering partial liquidity, and companies planning an ESOP liquidity event.
Summary: what most founders miss
- Secondaries are now a normal part of Indian rounds: startup ESOP payouts rose 70% to $423 Mn in FY26, and Q1 2026 ESOP buybacks alone were reported at about $220 Mn.
- Secondaries usually price at a discount to the primary round. That discount lowers the new investor's blended entry price, which is why leads often want a secondary component.
- Sellers pay 12.5% long-term capital gains on unlisted shares held over 24 months. From 1 April 2026, buybacks are taxed as capital gains again, with an extra levy for promoters.
- When a resident sells to a non-resident, FEMA requires a price at or above fair value, and Form FC-TRS within 60 days.
- Non-small private companies can only transfer shares in demat form. Get ISINs and demat accounts sorted before the round, not during closing.
Indian startups are staying private longer. Angels who backed companies between 2015 and 2020 are seven to ten years in with no IPO in sight, employees are sitting on vested options they cannot sell, and founders who have taken below-market salaries for years want some money out. Secondaries, the sale of existing shares rather than new ones, are how these pressures get released.
Why secondaries are now part of most Indian rounds
| Signal | Figure |
|---|---|
| Startup ESOP payouts in FY26 | $423 Mn, up 70%, concentrated in a few large companies |
| ESOP buybacks, 2020 to Q1 2026 | About $1,977 Mn across more than 100 companies |
| ESOP buybacks in all of 2025 | Just over $75 Mn |
| ESOP buybacks in Q1 2026 | About $220 Mn |
| Indian Angel Network portfolio | 271 companies, 17 exits |
ESOP payouts: Ascendants, citing FY26 data. ESOP buybacks: Unlisted Intel (Q1 2026) and Entrackr as cited by Dealplexus (2020 to Q1 2026 and full-year 2025). Angel exits: Tracxn profile of Indian Angel Network, February 2026.
Liquidity is lumpy and concentrated. It arrives around large rounds and IPO preparation, which is exactly why founders should plan secondaries into the round rather than handle them as favours afterwards.
Three kinds of secondary, three different negotiations
| Type | Who sells, who buys | Why it happens | What to watch |
|---|---|---|---|
| Angel or early-investor exit | Angels and seed funds sell to the new lead or a secondary fund | The lead wants fewer holders and a cleaner cap table; early investors want returns | Discount level, which holders exit, whether remaining angels keep their rights |
| Founder partial liquidity | Founders sell a small part of their holding, usually to the lead | Years of low salary, personal debt, a house; investors prefer a founder who is not financially stressed | Size (commonly 5% to 10% of the founder's holding at Series A and later), signalling, vesting on the remainder |
| ESOP liquidity | Employees sell vested shares in a tender to investors, or the company buys back | Retention, and making ESOPs credible in hiring | Employees must exercise first, which can trigger tax; company buybacks have legal limits |
Swipe the table sideways to see all columns.
Practitioner summary of how secondaries are used in Indian Series A to growth rounds.
How secondaries are priced, and why the lead likes them
Secondary shares in Indian startups usually trade at a discount to the latest primary price. Common shares carry fewer rights than the investor's CCPS, the stake is small and illiquid, and the seller usually wants out more than the buyer wants in. Practitioner discounts run from about 15% for a hot company with an active lead to 50% or more for a stalled one.
| Component | Amount | Price per share | Shares bought |
|---|---|---|---|
| Primary (new shares) | ₹20 Cr | ₹100 | 20.00 lakh |
| Secondary (from angels, 30% discount) | ₹5 Cr | ₹70 | 7.14 lakh |
| Total for the lead | ₹25 Cr | About ₹92 blended | 27.14 lakh |
Swipe the table sideways to see all columns.
Illustrative. Primary: ₹20 Cr at ₹100 a share buys 20 lakh shares. Secondary: ₹5 Cr at ₹70 a share buys about 7.14 lakh shares. Blended: ₹25 Cr ÷ 27.14 lakh shares = about ₹92 a share.
How secondaries are taxed in India after April 2026
| Situation | Rule | Practical effect |
|---|---|---|
| Seller held unlisted shares more than 24 months | Long-term capital gains at 12.5%, without indexation | Most angel exits and founder secondaries fall here |
| Seller held 24 months or less | Short-term capital gains at slab rates | Employees who exercised recently and sell quickly pay more |
| Price below fair market value: buyer | Shortfall over ₹50,000 is taxed as income in the buyer's hands (Section 92(2)(m)) | For unquoted equity, fair market value under Rule 57 is largely book-value based, so a discount to the last round price is usually safe for loss-making startups |
| Price below fair market value: seller | Fair market value is deemed to be the sale price for capital gains (Section 79) | Matters for profitable, asset-heavy companies where book value is high |
| Company buyback, from 1 April 2026 | Taxed as capital gains in the shareholder's hands again (it was deemed dividend from October 2024), with an additional levy for promoters | ESOP buybacks become more tax-efficient for employees; founders classed as promoters pay more |
| Employee exercising options before selling | Perquisite tax on fair value minus exercise price at exercise | Eligible DPIIT startups' employees can defer this tax; plan the exercise and sale together |
Income-tax Act 2025 and Income-tax Rules 2026 (Section 92(2)(m) was Section 56(2)(x), Section 79 was Section 50CA, Rule 57 was Rule 11UA of the old law), as summarised by Acuity Law (May 2026). Buyback changes per Finance Act 2026. Rates exclude surcharge and cess. Confirm with your CA.
When one side is foreign: FEMA rules
| Direction | Pricing rule | Reporting |
|---|---|---|
| Resident sells to non-resident | Price at or above fair value, under an internationally accepted method | Form FC-TRS within 60 days, filed by the resident party |
| Non-resident sells to resident | Price at or below fair value | Form FC-TRS within 60 days |
| Deferred or escrowed consideration | Up to 25% of the price can be deferred, for up to 18 months | Within the same fair-value limits |
FEMA (Non-Debt Instruments) Rules 2019. Investors from countries sharing a land border with India also need to check Press Note 3; see our Press Note 3 article.
The trap: an Indian angel selling to a foreign fund at a 40% discount to the last round. FEMA requires the price to be at or above fair value, so the fair-value report has to support the discounted price. Commission it before agreeing the number.
Paperwork, and the demat requirement many companies miss
- Demat. Under Rule 9B of the Prospectus and Allotment of Securities Rules, private companies other than small companies (paid-up capital up to ₹4 Cr and turnover up to ₹40 Cr) had to enable demat by 30 June 2025, and their shares can now be issued and transferred only in demat form. Buyers and sellers both need demat accounts, and the company needs an ISIN for each class.
- Transfer restrictions. Your AoA and SHA will have rights of first refusal or offer, tag-along rights and board approval for transfers. Get written waivers from every holder who has them.
- Documents. A share purchase agreement, a deed of adherence to the SHA for the buyer, stamp duty on the transfer, the board resolution and updated registers.
- Rights that move with the shares. Decide whether the buyer inherits the seller's information rights, pro rata rights or board nomination right. Many companies allow economic rights to transfer but not governance rights.
What founders and the company should control
- Who can buy. Block competitors and unknown HNIs; an unvetted buyer on the cap table is a diligence question in the next round.
- What information buyers get. Use a short, approved information pack under NDA. Do not let sellers circulate your data room.
- Founder secondary size. Keep it small relative to holdings and tie it to a primary round. A founder selling a large share at seed sends the wrong signal.
- Company buybacks are limited. A buyback under Section 68 is capped at 25% of paid-up capital and free reserves, must be funded from free reserves, securities premium or a separate issue, and can be done once in 12 months. Startups with large securities premium from past rounds can use it; others need an investor-led tender instead.
Case study
The angel clean-up that unblocked a Series A
Packaged snacks brand raising a ₹30 Cr Series A at a ₹150 Cr pre-money
Situation
The cap table had 26 holders, including 21 angels who had come in between 2020 and 2022 at ₹20 to 40 Cr valuations. Together the angels held 9%.
What was missed
The Series A lead was not willing to manage 21 small holders with different side letters, and several angels were asking for exits.
What changed
Alongside the primary, the lead bought 6% of the company from 15 angels at a 25% discount to the round price, about ₹6.75 Cr. Six angels who wanted to stay kept their shares and signed a fresh deed of adherence. Demat accounts and ISINs were set up before signing.
Outcome
The cap table fell from 26 holders to 12, including the new lead. Angels who had invested at a ₹30 Cr post-money exited at about 3.75x. The lead's blended entry was about 6% below the headline valuation.
The lesson
A secondary component can solve the lead's price concern, give early backers an exit, and clean the cap table in one transaction. Plan it into the term sheet.
Illustrative case. 6% of the pre-round company at ₹150 Cr = ₹9 Cr; at a 25% discount, ₹6.75 Cr. ₹150 Cr ÷ ₹30 Cr × 0.75 = 3.75x. Lead: ₹30 Cr primary for 16.7% of post-money plus 5% of post-money via secondary, ₹36.75 Cr for 21.7%, an implied ₹170 Cr against a ₹180 Cr headline.
Related: What your valuation report actually says and Press Note 3 after the 2026 change. Planning a round with a secondary component? Talk to us.
Sources
- Ascendants: Startup ESOP payouts jump 70% in FY26
- Unlisted Intel: ESOP buybacks in Q1 2026
- Dealplexus: Angel exits and ESOP buybacks in India (Tracxn, Entrackr)
- Taxguru: Buyback taxation moves to capital gains from 1 April 2026
- Fox Mandal: MCA extends demat deadline for private companies to 30 June 2025
- Acuity Law via Legal 500: Income-tax Act 2025 provisions on transfers below fair value
Questions founders ask us
What is a secondary sale in a startup?
A sale of existing shares by one shareholder to another, such as an angel selling to a new investor. The money goes to the seller, not the company. It is different from a primary issue, where the company issues new shares and receives the money.
At what discount do startup secondaries trade in India?
Usually at a discount to the latest primary price, from about 15% for a company with strong momentum to 50% or more for a stalled one. The discount reflects fewer rights on common shares, small illiquid stakes and the seller's need to exit. These are practitioner ranges, not published data.
How is a secondary sale of unlisted shares taxed in India?
Long-term capital gains at 12.5% if held more than 24 months, short-term at slab rates otherwise. If the price is below fair market value under the Income-tax Rules, the buyer can be taxed on the shortfall and the seller's sale price can be deemed to be fair market value.
Can founders sell some of their shares during a funding round?
Yes, usually to the round's lead, and most commonly at Series A or later. Investors generally accept 5% to 10% of a founder's holding when it relieves real financial pressure. Larger sales or sales at seed stage raise questions about commitment.
Do private company shares have to be in demat form for a secondary?
For private companies that are not small companies, yes. Rule 9B required them to enable demat by 30 June 2025, and shares can now be transferred only in demat form. Small companies, with paid-up capital up to ₹4 Cr and turnover up to ₹40 Cr, are exempt.
How did buyback taxation change in 2026?
From 1 April 2026, buyback proceeds are taxed as capital gains in the shareholder's hands, reversing the October 2024 change that taxed them as deemed dividend. Promoters pay an additional levy on top of capital gains tax.
About the author
Written by the Alphamark Venture Partners team, a fundraising advisory firm helping founders raise seed, angel and pre-Series A rounds, with a focus on consumer, consumer tech and consumer AI. Rules, figures and benchmarks are checked against the sources listed and are current as of the date shown. This is general information, not legal, tax or investment advice.
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