ESOP buybacks: how Indian startups give employees cash before an IPO

For years, the honest answer to "when can I cash my ESOPs?" was "when the company lists or gets acquired." That has changed. Indian startups now run regular ESOP buybacks, and for many employees a buyback is the first time equity turns into money in the bank.

What a buyback actually is

In an ESOP buyback, an employee sells vested options or shares back for cash. It can be structured in a few ways:

• The company buys back shares that employees hold after exercising. Under the Companies Act this is a formal buyback with legal limits on size and frequency.
• An investor buys the shares in a secondary transaction, often alongside a new funding round. The company coordinates it, but the money comes from the investor.
• The company pays out the value of vested options without employees exercising first, typically by cancelling the options for cash.

The structure matters because it changes when and how you are taxed. Your company's buyback document should spell it out.

The numbers so far

Buybacks are now a regular part of the ecosystem, though they come in waves:

Two patterns stand out. First, a handful of large companies account for most of the money: Flipkart, PhonePe, BrowserStack, Razorpay, Swiggy and Innovaccer appear again and again. Second, the number of companies offering liquidity can fall even when the total pool rises. Liquidity is growing, but it is not spreading evenly.

How a buyback is usually priced

The buyback price is normally set close to the latest funding round price or the latest valuation. That is why the date and basis of the valuation matter so much: a buyback priced off a round from two years ago may be well above or below what the company would fetch today.

What to check when a buyback is announced

1. Who is eligible? Current employees only, or former employees too? Some companies now include alumni.
2. How much can you sell? Many programmes cap participation at a percentage of vested holdings, often 10–25%.
3. The price and its basis. Which valuation or round is it tied to?
4. The tax treatment. If you sell options for cash, the payout is usually taxed as salary. If you sell shares you already hold, it is usually a capital gain. From 1 April 2026, consideration received on a company buyback of shares is taxed as capital gains again rather than as a deemed dividend, following Budget 2026.
5. The deadline. Windows are often short, sometimes only a few weeks.

Should you sell?

That depends on your finances, your view of the company and your concentration in a single stock. A useful rule of thumb many employees use is to sell enough to cover the tax you have already paid or will owe on exercise, and to take some risk off the table, while keeping the rest. It is a personal decision, and a tax adviser can help you model it.

This article is general information, not tax, legal or investment advice.

Sources: Inc42 — ESOP buybacks in 2025, Inc42 — ESOP buybacks in 2024, Entrackr via Pulse — Q1 2026 buybacks, Business Today — Budget 2026 buyback taxation