Paper Wealth Is Not Real Wealth
Vested ESOP shares in a private company can look valuable on a cap table and still buy nothing at the shop. The shares are illiquid, meaning there is usually no open market on which to sell them. For employees to actually convert equity into cash, a liquidity event has to happen. There are three main routes: a company buyback, a secondary sale, and liquidity at a full exit.
Company Buybacks
In a buyback, the company itself repurchases shares from employees, usually at the latest fair market value set by a recent funding round. Buybacks are the most common structured liquidity programme at Indian startups because the company controls the timing and terms. They are typically triggered by a specific event, such as closing a large funding round when there is fresh capital on the balance sheet, reaching cash flow positivity, or running a periodic programme alongside an investor transaction.
Buybacks are rarely a blanket cash out. Companies commonly cap how much each employee can sell, for example a percentage of vested holdings, so that employees retain upside and the company manages its cash. Communicate these caps clearly, because an uncapped expectation followed by a capped reality is a classic trust killer.
Secondary Sales
A secondary sale is different from a buyback. Here an outside or existing investor, not the company, buys shares directly from employees or early shareholders. Secondaries often ride alongside a primary funding round, where the incoming investor puts fresh money into the company as primary capital and also buys some existing shares as a secondary. Because the cash comes from an investor rather than the company reserves, secondaries let a startup provide liquidity without spending operating capital. From the employee side, the experience is similar to a buyback, they sell some shares for cash, but the buyer and the legal mechanics differ.
Liquidity at a Full Exit
The largest liquidity events come at a full exit, when the company is acquired or goes public. In an acquisition, employee shares are usually bought out as part of the deal. In a public listing, shares become tradable, though employees are normally subject to a lock in period before they can sell. These events can be transformative, but they are also uncertain and often years away, which is exactly why interim buybacks and secondaries have become so important for retention.
The Tax Angle Employees Ask About
How the cash out is taxed depends on the route. In a secondary sale, the employee is selling shares to a buyer, so the profit is taxed as capital gains, with the cost of acquisition being the FMV that was already taxed as a perquisite at exercise. That prevents the same value being taxed twice.
A company buyback has a more eventful recent history. Between 1 October 2024 and 31 March 2026, buyback proceeds from a domestic company were taxed as a deemed dividend in the shareholder hands at slab rates, with the original cost allowed only as a capital loss. From 1 April 2026, under the Income-tax Act, 2025, buybacks returned to capital gains treatment, so shareholders are taxed on the gain, that is the buyback price minus the cost of acquisition, rather than on the full amount. Because the tax treatment has shifted more than once, founders should have employees confirm the current position with a tax adviser before a buyback rather than relying on how the last one worked.
Design Liquidity Deliberately
Liquidity is not an accident, it is a design choice. Founders who plan periodic buybacks, communicate the size and cadence, and set clear caps turn ESOPs from a vague promise into a credible one. Employees do not expect to cash out on day one, but they do expect a realistic and honest path to eventually doing so.