Most Indian startup employees have heard the term ‘ESOP secondary fund’ and assumed it means the same as a buyback. It doesn’t. An ESOP secondary fund is a fundamentally different structure — and understanding the difference could change what you think is possible with your ESOPs (Employee Stock Option).
TL;DR – The Quick Version
- An ESOP secondary fund is a SEBI-registered AIF that buys vested employee shares directly using fund capital, not company cash.
- Employees get liquidity without waiting for a buyback or IPO.
- Founders facilitate the transfer without touching their balance sheet.
- The process runs in five stages from founder initiation to cash settlement – typically a few weeks end to end.
- Tax treatment is the same as any other unlisted share sale: Long Term Capital Gains (LTCG) at 12.5% (held 24+ months from exercise), STCG at income slab rate.
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Why Don't Employees Have Independent Liquidity Paths?
For most Indian startup employees, significant paper wealth from vested shares has no reliable conversion mechanism. Buybacks require company cash. Secondary transactions during funding rounds depend on investor appetite and founder willingness. Acquisitions are unpredictable. The result: employees sitting on valuable equity with no path to cash that they control.
India has a structural problem with startup equity. Hundreds of thousands of employees hold vested shares in growth-stage companies worth – on paper in significant amounts. The companies are real, well-funded, and growing. But the shares cannot be sold on any exchange. There is no market.
The traditional paths to liquidity are usually a company buyback, a secondary transaction during a funding round, or an acquisition, all depend entirely on company timing and company decisions. Employees who need or want liquidity have no independent path. They wait.
An ESOP secondary fund exists to solve exactly this. It is a pool of dedicated capital, raised from institutional investors, HNI, Family Offices, that purchases vested employee shares in growth-stage private companies – giving employees cash without requiring the company to initiate a buyback programme or be in the middle of a funding round
What an ESOP Secondary Fund Actually Is?
An ESOP secondary fund is a SEBI-registered Category AIF with a single mandate: purchase vested employee shares in growth-stage private companies using dedicated fund capital. This is not a lending product, not a buyback, and not a primary investment. The company receives no money. The fund becomes a minority shareholder and holds until the company’s eventual exit.
Unlike a mutual fund or a VC fund, it does not invest in new equity issued by companies. It purchases existing shares from employees who have already vested and exercised their options. The company receives no capital from this transaction. The fund pays the employee directly.
The simplest way to think about it: a buyback is the company buying back its own shares using its own money. An ESOP secondary fund is an outside investor buying employee shares using fund capital. Same outcome for the employee – cash in hand. Completely different mechanism.
From the employee’s perspective, the transaction looks like this:
- Employee has vested and exercised shares in a growth-stage Indian startup
- Founder initiates a conversation with the ESOP secondary fund
- Fund evaluates the company by its stage, valuation, growth trajectory
- Fund agrees on a price per share with the company
- Board approves the share transfer under the Companies Act 2013
- Employee receives cash, typically within a few days of approval
- Fund holds the shares until the company’s eventual exit – IPO, M&A, or otherwise
What Do People Confuse an ESOP Secondary Fund With?
Three structures are commonly mistaken for an ESOP secondary fund:
1. Company buybacks, 2. VC secondary funds, and 3. pre-IPO funds.
Each operates differently in terms of capital source, target company stage, and purpose. Understanding the distinction determines which path is actually available to you and when.
1. ESOP Secondary Fund is not a Company Buyback
Company Buyback | ESOP Secondary Fund | |
Who pays the employee | The company, from its own capital | The fund, from investor capital |
Impact on company balance sheet | Cash goes out of the company | No impact on company cash |
Requires funding round | Sometimes | No |
Available at any company stage | No – needs cash surplus | As decided by the fund manager typically growth stage |
New shareholders introduced | No | Shareholder gets replaced – fund becomes a shareholder |
The practical implication: a buyback requires the company to have cash and the willingness to spend it on employee liquidity. An ESOP secondary fund requires neither. It is an independent source of capital.
2. ESOP Secondary Fund is not a VC Secondary Fund
VC secondary funds purchase shares from founders, early investors, and VCs – people who hold large stakes and want partial liquidity. They operate in the millions-of-dollars-per-transaction range and are primarily investor-to-investor deals.
An ESOP secondary fund is specifically built for employees i.e., people who hold smaller stakes, need structured support for compliance and valuation, and have different tax and transfer considerations. The fund’s mandate, its LP base, and its operational infrastructure are built around employee equity, not investor equity.
3. ESOP Secondary Fund is not a Pre-IPO Fund
Pre-IPO funds invest in companies 12–24 months before a listing, at late stage, with a focus on capital appreciation from the IPO event itself. They invest in primary rounds or buy large secondary blocks close to a public offering.
An ESOP secondary fund operates years earlier at Series B, C, or D stage – focused on employee liquidity rather than IPO-linked returns. Hissa’s fund, for example, targets growth-stage startups that may be 5–8 years away from any public offering. The holding period is relatively shorter than a typical primary VC fund. The thesis is different.
How an ESOP Secondary Fund Transaction Works in India?
The process runs in five stages:
1. Founder initiation, 2. Company evaluation, 3. Pricing and terms, 4. Board approval and
5. Legal transfer, and cash settlement.
From initial founder contact to cash in the employee’s account typically takes a few weeks. The evaluation phase takes the longest. Hissa’s fund targets T+5 settlement from board approval to cash.
Stage 1 – Founder Initiation
The transaction begins with the founder or CFO contacting the fund. Employees typically do not approach the fund directly. If a set of employees want liquidity they usually connect the fund with the company for evaluation. A private company shares cannot be transferred without board approval under the Companies Act 2013. The founder opens the conversation, typically because employees have been asking about liquidity or because the company wants to use a liquidity event as a retention tool.
Stage 2 – Company Evaluation
The fund evaluates the company on several dimensions: the stage of the business, its revenue and growth trajectory, the quality of its investor base, the cap table structure, and the valuation established in the most recent funding round. The fund is making a long-term investment – it will hold the shares until the company exits, which may be 5-8 years away.
Stage 3 – Pricing and Terms
The share price is typically based on the most recent round valuation, often with a discount to reflect the illiquidity and the long hold period. Both the company and the fund must agree to the price.
Stage 4 – Board Approval and Legal Transfer
The board approves the share transfer by resolution. The employee’s shares are transferred to the fund in compliance with the Companies Act 2013 and any right of first refusal (ROFR) clauses in the shareholder agreement. In cases of ROFR, the Company provides a ROFR waiver letter to enable the transaction.
Stage 5 – Employee Receives Cash
Once legal transfer is complete, the employee receives cash – which is the agreed price per share multiplied by the number of shares sold. The employee can choose to sell some or all of their vested shares. Partial sales are typically permitted, allowing employees to retain upside while accessing immediate liquidity.
Tax note: the sale is treated as a transfer of unlisted private company shares. Shares held more than 24 months after exercise attract LTCG at 12.5%. Shares held less than 24 months attract STCG at your income slab rate. This is separate from the perquisite tax paid at the time of exercise. See the full guide on ESOP tax in India for worked examples.
What "Growth Stage" Means and Why It Matters?
Growth stage is roughly Series B to Series D where an ESOP secondary fund creates the most value for employees. Vesting is far enough along that stakes are meaningful. A recent funding round anchors the valuation. And the IPO is still years away, making the alternative – waiting indefinitely is unreasonable for employees who have already earned their equity.
This stage matters for two reasons. First, the company’s valuation is established and verifiable through the recent funding round which can help in anchoring the share price. Second, the company is far enough from an IPO that employees would otherwise face years of illiquidity. The fund fills that gap.
This is distinct from early-stage companies (where valuation is too uncertain and the risk too high for a secondary fund) and late-stage companies (where IPO timelines are near enough that employees may prefer to wait).
The growth-stage window which is typically Series B through D is where the ESOP secondary fund creates the most value. Employees have meaningful vested stakes, valuations are credible, and the exit horizon is long enough that liquidity matters.
Why ESOP Secondary Fund Category Is Emerging in India Now?
India’s startup ecosystem has matured to a point where a dedicated ESOP secondary fund is not just viable but it is necessary. The regulatory infrastructure under SEBI’s AIF framework has always been in place. What has changed is everything else: the number of employees with meaningful vested stakes, the length of time companies are staying private, and the collective awareness that paper wealth needs a real path to cash. The demand, the deal flow, and the employee sophistication are all now there. The category has arrived
Three structural forces are converging to make the ESOP secondary fund category viable in India:
Indian startups are staying private longer
The average Indian startup takes 10–12 years to reach an IPO. Employees who joined in 2014–2018 are now approaching a decade of tenure, with significant vested equity and no clear path to liquidity. The demand for interim liquidity has never been higher.
The employee equity base is large enough to matter
India now has hundreds of thousands of startup employees with meaningful vested stakes. The aggregate value of unlocked employee equity in Indian growth-stage startups runs into billions of dollars. This scale makes a dedicated fund structure viable and there is enough deal flow to justify the infrastructure.
SEBI’s AIF framework provides the regulatory structure
India’s Alternative Investment Fund regulations under SEBI provide a clear, compliant structure for operating a secondary fund. A SEBI AIF can purchase unlisted shares from employees, hold them, and eventually exit. This regulatory structure has been in place since 2012, what was missing was not the framework, but the ecosystem maturity to make the category viable.
What an ESOP Secondary Fund Means for Founders?
A secondary fund transaction asks for nothing of the company’s cash reserves. The founder’s role is to initiate the conversation and approve the board resolution. In return, senior employees approaching full vesting receive liquidity and the company gains a concrete, credible answer to a question every strong candidate eventually asks: ‘Is the equity in my offer letter actually accessible?’
An ESOP secondary fund transaction is not just a liquidity event for employees. For founders, it is a talent retention and culture signal.
When a company facilitates a secondary fund transaction even without spending its own capital, it demonstrates to existing and prospective employees that the equity in their offer letter is real and accessible. This matters in hiring conversations and in retention of senior employees who are approaching full vesting.
The other benefit for founders is cap table management. Unlike a buyback, which uses company cash, the secondary fund transaction does not drain the company’s balance sheet. The company facilitates the transfer without bearing the financial cost.
For a fuller picture of how employee liquidity works across all paths — from buybacks to M&A — see ESOP liquidity in India: 4 ways to convert shares to cash.
Understanding Your Stock Options - For Liquidity
Whether you’re an employee assessing your vested shares, or a founder exploring liquidity options for your team – the right conversation starts with understanding what’s available.
Hissa’s $35M ESOP Secondary Fund is India’s first fund built exclusively to purchase employee shares in growth-stage Indian startups. If you want to explore whether your company or your shares qualify, feel free to talk to us.
About Hissa
Hissa is India’s most comprehensive ESOP company. Hissa combines ESOP management software, India’s first dedicated ESOP secondary fund – serving founders, employees, and investors across the Indian startup ecosystem.
Frequently Asked Questions
What is an ESOP secondary fund in India?
An ESOP secondary fund is a SEBI-registered investment fund (typically structured as a Category II AIF) that purchases vested employee shares in growth-stage Indian startups. It uses fund capital — raised from institutional investors — to pay employees directly, without the company needing to initiate a buyback or be in the middle of a funding round. Hissa operates India’s first dedicated ESOP secondary fund with a corpus of $35 million.
How is an ESOP secondary fund different from a company buyback?
A buyback uses the company’s own capital to repurchase shares. An ESOP secondary fund uses external fund capital. This means no impact on the company’s balance sheet, no requirement for the company to have a cash surplus, and no need for a funding round. Both require board approval and founder initiation — but the capital source is entirely different.
Can I approach an ESOP secondary fund directly as an employee?
No. Private company shares in India cannot be transferred without board approval under the Companies Act 2013. The founder or CFO must initiate the conversation with the fund. Employees cannot approach the fund directly. If you are interested in exploring this path, the right first step is to raise the conversation with your founder.
What stage of company does an ESOP secondary fund target in India?
Growth-stage startups — typically Series B to Series D — that have demonstrated product-market fit, have institutional investors on their cap table, and have a verifiable valuation from a recent funding round. Early-stage companies are generally too risky for secondary fund investment. Late-stage companies close to an IPO are often better served waiting for the public market.
How long does the ESOP secondary fund transaction take?
From initial founder contact to cash in the employee’s account, the process typically takes a few weeks. The evaluation phase (fund assessing the company) takes the longest — usually 1–3 weeks. Once terms are agreed and board approval is obtained, the share transfer and cash settlement can happen within a week. Hissa’s fund targets T+5 settlement from board approval to cash.
Is selling shares to an ESOP secondary fund taxed differently in India?
No — it is treated the same as any other sale of unlisted private company shares. Shares held more than 24 months after exercise are subject to Long-Term Capital Gains tax at 12.5% above the Rs 1.25 lakh annual exemption. Shares held less than 24 months are taxed as Short-Term Capital Gains at your income slab rate. The perquisite tax paid at exercise is a separate, earlier event and is not affected by the sale.
What is the difference between an ESOP secondary fund and a pre-IPO fund in India?
A pre-IPO fund invests 12–24 months before a company lists, focused on capturing IPO-linked returns. An ESOP secondary fund operates years earlier — at growth stage — focused on employee liquidity rather than IPO timing. The holding period for an ESOP secondary fund is typically 5–8 years. The investment thesis, target company stage, and operational structure are entirely different.
Which is India's first dedicated ESOP secondary fund?
Hissa Fund I – a $35 million SEBI-registered Category II AIF operated by Hissa. It is India’s first fund built exclusively around purchasing employee shares in growth-stage Indian startups. Contact: hissa.com/liquidity
