Secondary sales: how early investors and employees cash out

In a primary round, a company issues new shares and receives the money. In a secondary sale, no new shares are created. An existing shareholder sells shares they already hold to a buyer, and the money goes to the seller. The company's own bank balance does not change, although its ownership list (the cap table) does.

Secondaries can be small or large. A founder may sell a few percent to a new investor during a funding round. An early angel may sell out to a later fund. A group of employees may be allowed to sell part of their vested shares in an organised event. The buyer may be a venture fund, a growth fund, a family office or even the company's other shareholders.

Startups can stay private for ten years or more, and holding shares that cannot be sold for that long is hard. Founders may have lived on small salaries for years and want to buy a home or reduce personal risk. Early investors may be near the end of their fund's life and need to return money to their own backers. Employees with valuable options may need cash for tax on exercise or for personal reasons.

A secondary sale is often paired with a primary round. A new investor puts most of the money into the company and buys a smaller part from existing holders. This can make the round bigger, give early holders a partial exit and let the new investor build a larger stake faster.

Common forms include the following.

• Founder secondary: founders sell a small part of their stake, often alongside a new round. Investors usually limit how much.
• Investor-to-investor sale: an early fund sells its stake to a later one, giving the early fund an exit.
• Employee liquidity or tender: the company arranges a window in which staff can sell some vested shares to approved buyers.
• Secondary fund purchase: funds that specialise in buying existing stakes at a negotiated price, sometimes at a discount to the latest round.
• Block sale before or after an IPO: shares sold through an offer for sale in the IPO, or later on the stock exchange after the lock-in ends.

The price is agreed between buyer and seller. It may be close to the latest round price, or lower, which is called a discount. Buyers ask for a discount because shares bought in a secondary may carry fewer rights than those in a new round, for example a weaker liquidation preference, and because the seller wants to leave. A buyer also depends on a later exit, which is uncertain.

In hot markets, strong companies may see secondaries at or above the last round price. In weak markets, discounts can be large. A secondary price is useful as a clue to market mood, but it comes from a few trades and is not a formal valuation.

The company's articles and the shareholders' agreement usually control transfers. They often give the company or other investors a right of first refusal (ROFR), meaning the right to buy the shares before an outsider, and a tag-along right, which lets other holders join a sale. The company's board often has to consent, and the company must record the transfer and update its share register.

When one party lives outside India, the foreign exchange rules apply, including pricing and reporting requirements for the transfer. The buyer will do due diligence on the company, as described in our due diligence guide. For anything larger, use a lawyer to check the paperwork.

As of October 2026, an Indian resident who sells unlisted shares held for more than 24 months pays long-term capital gains tax at 12.5% without indexation. If the shares were held for 24 months or less, the gain is short-term and is added to income and taxed at the person's slab rate. Rates and holding periods change with the Budget, and special rules apply to non-residents, to ESOP shares, and to sales below a prescribed fair value.

There is also a sense of fairness that boards consider. If founders sell a lot while staff cannot, morale can suffer. Many companies therefore pair a founder sale with a window for employees, or set a modest cap for founders. Investors in the company often have a say, because a secondary changes who owns the company and can shift control. Clear rules written in advance, rather than deals made one at a time, usually cause fewer arguments later.

Employees should note that tax may also arise when the options are exercised, on the difference between the share's value and the exercise price, before any sale happens. Our guide on ESOP taxation covers this. This guide is general information and not tax or legal advice, so check your own position with a chartered accountant.

Investors sometimes worry that a founder selling shares is losing faith in the company, so large founder secondaries can send a bad signal. Heavy selling by early holders can also leave a new investor holding shares from sellers who wanted out. For employees, a tender may be offered only to some staff or only once, so do not plan your finances around it.

Buyers should remember that secondary shares may be hard to sell again until the company exits. Sellers should remember that selling early may mean giving up later gains if the company grows.