The Lifecycle of an Unlisted Share — From ESOP Grant to Post-IPO Exit
Reviewed by Kanishk Dev Bangia, NISM Series XV Certified Research Analyst
Last Updated: May 2026 | Reg. No: NISM-202300182946
If the retail buyer purchases the unlisted stock in India in 2026, then most likely he is buying his/her share at one of the final points on a path that can go as far back as ten years, which could start from the issuance of an ESOP for an employee, the raising of seed money from an angel investor, or an allocation of funds under Series A to a venture capital fund. The price at which the retail buyer buys his/her share is the total outcome of every point on that path, and the journey from this point either to listing or strategic exit will depend on every regulatory restriction thatlong the way.
The essay examines the entire lifecycle of the share. The essay begins by examining the share creation events at the inception of the company, including founder’s shares, seed round of preferred shares, and ESOPs, then follows up on further financing rounds, secondary market transactions between employees and early investors, the pre-IPO period, the DRHP filing, SEBI’s approval process, the listing phase, the six months following the listing where all shares remain locked until further trading, and finally ends with the change in behaviour towards becoming listed-equity-class shares.
The objective is not to ensure that every retail investor becomes an expert in the later stages of the capital markets cycle; the idea is simply to ensure that when a person evaluates a share, he/she is aware of which point in the lifecycle the share is at and how it would generally behave till the exit point from here.
Stage 1 — Founder shares and the first equity-creation event
The creation of every unlisted stock in India starts with an equity issuance process as per the Companies Act, 2013. As soon as a company is established, the promoters will buy up its first equity at the face value, which may be ₹1 or ₹10 per stock. This constitutes the most basic unlisted stock form, which would be registered by the Ministry of Corporate Affairs. These stocks are dematerialized, meaning they are stored electronically by the promoters through their demat accounts.
The stock does not yet have an external market price in this case – the only basis for pricing is face value, plus any amount of the premium accumulated by the company through its own activities. In practice, founder shares do not exchange hands externally at this point, since the shares are owned by the founders themselves throughout the early-stage growth phase.
What the retail investor should know: when you go through the DRHP of a pre-IPO company several years hence, the founder share base will be the number reported as promoter holding. The promoter lock-in scheme used after the IPO (which exceeds the six months’ lock-in period used for all other investors) is predicated on this earliest creation of equity. It’s also one of the reasons why the off-market trade in unlisted shares for a particular company virtually never consists of sales by founders in retail-sized lots, since the founders always hold their shares since inception.
Stage 2 — Seed and Series funding rounds
The subsequent equity creation stage is the initial outside capital raising round. In this stage, the angel investors, seed investors, and venture capital investors purchase the new shares (preferably, the shares having some rights such as protection from dilution, liquidation preference, and board position) for a price significantly higher than the face value of the founders' shares. Subsequent equity issuance in the Series A, Series B, Series C, etc., involves further issuance of new equity at incrementally higher prices.
In the determination of prices at each round of equity issue, one of the following three methods is followed: valuation by an independent valuer in cases where compliance with Section 56(2)(viib) of the Income Tax Act, which makes any premium paid beyond fair value liable for taxation, requires such a method (until the amending act of 2024), internal board determination of fair value based on the performance figures of the enterprise, or the bid method among several lead investors. According to the RBI FEMA Non-Debt Instruments Rules, fair value assessment should be certified by either a SEBI Category-I Merchant Banker or a Chartered Accountant for foreign equity issues.
The moment a Series round price is established, it becomes publicly quoted (registered by the Registrar of Companies in Form PAS-3 return of allotment, occasionally leaked in coverage of the funding event). This reference is subsequently cited by the dealer network down the road once secondary transactions come about. The company’s “most recent priced round” is one of the key bits of information referenced in any pre-IPO discussion.
What the retail investor should understand about the situation: when a dealer cites a company’s “Series F priced at ₹X per share, two years ago,” this is what we refer to as stage-2 data. The current dealer price must have a reasonable premium over the last round price, based on the passage of time, the company’s progress since, and the IPO premium. A price significantly higher than the last round price typically means the company had made considerable improvements since then; while a lower price indicates little company progress since the last round.
Stage 3 — ESOP grants and the employee equity base
Concurrently, the company establishes an Employee Stock Option Plan (ESOP), which allows the employees to share the profit from their growth in the company. This will be regulated by the provisions of Companies Act, 2013 (Section 62(1)(b) for the ESOP of a listed company) and also by the relevant provisions of SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, if applicable.
How it works: an employee gets a certain number of stock options at a strike price (generally the latest fair value benchmark, or a discounted version thereof). These options vest over a stipulated time period, generally 3-5 years, in equal quarterly or annual instalments with a one-year cliff period. After the expiry of the vesting period, the option can be exercised by paying the strike price; the underlying stock will be issued to the employee's demat account. Exercise of the option is subject to tax liability, and under section 17(2)(vi) of the Income Tax Act, any excess of the fair market value of the stock on the date of exercise over the strike price paid is charged as perquisite income at the income tax slab of the individual (deferred until 2020 for start-ups).
Employees use their option rights to exercise them but find themselves unable to sell their stock because there is no stock exchange on which they can do this. To solve this problem, firms conduct buybacks from time to time in what they call “ESOP Buybacks”. The price of such buybacks is fixed by the board of the corporation conducting the activity, usually at a price below the market price of the open-secondary market because, again, the firm is the price setter and not a price taker as would be the case in a competitive environment.
What the retail buyer needs to know: ESOP-trust buyback prices form the basis of stage 5 dealer-network prices. Where dealers quote a certain price for the stock based on some transactions, the counterparty to such transaction would be an employee selling off his or her exercised options, either via the dealer or by virtue of an organized liquidity program conducted by the company. Dealer market rates have a 10%-25% premium over the ESOP-trust rates.
Stage 4 — Secondary trades among early investors
Whereas the company grows beyond its seed stage and Series A/B rounds, the early-stage investors (angel investors, seed investment companies, and early-stage investors of the company’s founders) begin looking to realize partial exits as well. With the need for distributing capital back to limited partners and rebalancing the portfolios, such pressure becomes counterproductive relative to the timeline of capital raising for the company. To address such a need, secondary transactions arise – when the existing shareholders exit their positions partially by selling portions of shares to new investors (growth-stage funds, family offices, or even private-equity companies investing ahead of the IPO).
Secondary transactions come in different sizes as well. A typical secondary is a sale of a 5-25% stake from an early-stage investor to one or two buyers. The price is kept confidential and revealed to the company and the new investor only but is not disclosed publicly. It comes down to transferring shares between parties through an off-exchange clearing system (CDSL/NSDL DIS).
Multiple secondary rounds can take place during the life cycle of the company. In each round, a new price reference is set, at times higher (if the company continues its growth and an IPO is coming soon), and sometimes lower (when the original investor wanted to exit without complications and took a discount to the last round price).
What the retail investor should know about the pricing: secondary transaction prices provide the cleanest and most reliable pricing benchmark for a pre-IPO firm. These transactions are arm’s-length deals done between well-informed parties for sizable amounts of stock and without any participation from the company itself. Whenever media reports cite the price in recent secondary deal at a certain per-share price, it should be seen as more credible compared to both last primary round (company controlled price) and ESOP trust prices (floor price controlled by the company).
Stage 5 — Dealer-network activity opens to retail
The moment the company reaches its late pre-IPO stage, meaning evaluation of an IPO, appointment of advisors, and preparation of the offer document’s financials, the dealer network activity with that particular share becomes quite active. Two things take place.
One, the introduction of retail-lot price becomes a norm in the market. Until now, most of the secondary market transactions are done in huge blocks (from ₹50 lakh to ₹50 crore). But when we reach the late pre-IPO stage, the dealers begin sourcing the smaller blocks from various sources like employees, early investors, or dealers themselves, and divide it into small retail lot sizes (minimum size ₹50,000 to ₹1,00,000).
Secondly, multiple dealers now start aggressively quoting the name. In the earlier days of the pre-IPO story of the company, perhaps 1-3 dealers might be quoting any retail interest in the share. At the late pre-IPO stage, 5-15 dealers can be quoting the share. It is during this phase that dealer network dynamics like last traded price referencing, fair value anchoring, and news flow reactions are highly active as discussed under price discovery in the dealer network.
What the retail buyer needs to know: stage 5 is the point where retail entry into unlisted shares takes place. The importance of buyer process rigor (dealer verification, contract note, CDSL clearing, demat credit validation) is highest during this phase as the level of activity also makes way for some of the less credible dealers. See the structural difference between unlisted and listed equity for context regarding why this phase requires more rigor on the buyer side than listed equity markets.
Stage 5 valuation is generally at a discount to peers based on a multiple approach such as enterprise value/EBITDA multiple or P/E ratio, where this discount may be 15-25%. This applies when an organization is working towards going public within the next 12 to 18 months.
Stage 6 — DRHP filing and the pre-listing window
With the filing of the Draft Red Herring Prospectus (DRHP) with SEBI, the stock becomes one of the second-highest levels of information available. This document contains all relevant information, including audited accounts, risk factors, peer comparisons, related party disclosures, ESOP details, and use of funds of the IPO proceeds.
On average, the stock price of the unlisted share increases between 8-20% in the 48 hours since the DRHP comes online on the SEBI website. For detailed explanation, see what happens to unlisted shares after filing the DRHP. However, to summarize, the increase is driven by more precise IPO timetables, less information asymmetry (as both audited accounts and risk factor disclosure are known), and institutions entering the book.
After DRHP filing but before listing, the share enjoys the highest level of dealer network activity. Pre-IPO shareholders who want out want to do that before lock-in kicks in, and potential buyers also enter the market to position themselves ahead of listing.
Risks for stage 6 are also at the peak level. SEBI may put out comments on the DRHP delaying the IPO process. It might also happen that the company decides to withdraw its DRHP due to valuation concerns or other business and regulatory issues. There may be some changes in the overall market environment making the IPO unsuitable for the set price band. Within any one-year period, somewhere between 10% and 20% of the DRHP filings will be withdrawn or materially refiled.
What should a retail investor know about this stage? Stage 6 represents the "highest information, highest activity, and highest risk" stage of the IPO life cycle. This means that the investor has to thoroughly understand the DRHP document, work on calculating fair value benchmarks on the basis of listed peers, triangulate dealer estimates, and consider the possibility of withdrawals when buying the security. Selling parties will achieve the best pre-lock-in exit option at stage 6.
Stage 7 — Listing day, six-month lock-in, and the transition to listed-equity behaviour
The day the company lists on NSE or BSE, three things happen simultaneously for a pre-IPO holder.
SEBI ICDR Regulation 16 lock-in begins. The 6-month lock-in period for the non-promoter before the IPO commences from the listing date. During these 180 days, the holder cannot sell these shares either on exchange or off-market. The lock-in is captured in the depositories (either CDSL or NSDL), which can be viewed as locked quantity in the demat statement.
ISIN change. There is a change in ISIN from pre-IPO ISIN to listed equity ISIN. The change is effected through the depository, along with the help of the company secretary. From the point of view of the holder, the only visible change in the demat statement is that of ISIN; the number of shares remains unchanged.
Change in tax treatment. As of listing date, there is a shift in tax regime for these shares from unlisted to listed shares. Section 111A of the Income Tax Act becomes applicable, where LTCG holding period decreases from 24 months to 12 months, while exemption for LTCG of ₹1.25 lakhs per year is available. Also, STCG tax slab rate reduces from slab to 20% post-Finance Act 2024. However, note that the LTCG/STCG holding period will continue to be calculated from the acquisition date of the share.
Price movement during lock-in period. Lock-in period does not prevent the price discovery of the share by the listed-equity market. Listed-equity trading in the freely tradable float (IPO public issue plus any shares held by anchor investors after being released from lock-in period of 30/90 days post listing) continues. Price shall adjust according to the laws of supply and demand in the listed-equity market. Pre-IPO holder observes price movement in listed equity but cannot trade at this price until 180 days from listing date.
Post lock-in period ends (after 180 days from listing date). Holder can sell the share in listed-equity market on par with any other listed-equity holder. After this, the life cycle of unlisted share in this ownership expires and decision-making framework of listed-equities takes over. Many pre-IPO holders choose this time as their natural exit route, particularly if listed price is higher than their cost of acquisition. Others retain the share and treat this ownership as a listed-equity investment.
What does the retail buyer need to know about stage 7: it marks the end of the unlisted share process and the start of the listed equity process. There is a new paradigm of decision-making: daily price visibility, no counterparty risk, reduced costs per transaction, and taxation as per listed equities. The lock-in period represents the transition where the holder experiences the price discovery process of listed equities but is unable to do anything about it. If you invest during stages 5 and 6, be prepared for this: 180 days where the listed price can vary 20 to 40 percent.
How retail entry decisions should account for the stage
Combining the stages, the following shows how the decision-making discipline of a retail buyer should evolve based on the lifecycle position of the share.
If the share is in stage 5 (active pre-IPO, without DRHP filing): The decision-making discipline involves counterparty validation (trustability of dealer networks), fair value assessment (relative to previous secondary block, relative to listed peer multiple, considering unlisted discount), and IPO timing analysis (12-18 months visibility against speculation about 24+ months). The tax period considered is Section 112 of the long-term capital gains threshold (24 months).
If the share is in stage 6 (DRHP filed, IPO pending): The decision-making discipline involves assessing DRHP document (disclosure in Schedule VI), fair value assessment using audited figures, withdrawal scenario risk assessment (5-15% downside risk tolerance) and exit strategy (exit in pre-lock period or stay until IPO). The tax period shifts to Section 111A from the point of listing.
If the share is at stage 7 (listed, in lock-in):Discipline covers patience (no exit opportunity for 180 days), monitoring listed-equity price for portfolio risk management, planning the post-lock-in exit (sell at lift-off, hold, partial exit), and monitoring institutional flow which may have been suppressed during the lock-in period.
The single most significant error one could commit as a retail investor is to adopt similar buying discipline in all stages. A stage 5 entry without IPO visibility is a long horizon exposure. Stage 6 entry after DRHP filing is a short horizon exposure with potential for withdrawal. Stage 7 entry in lock-in is a locked exposure with listed-equity price risk but no actionability. Each one is a separate exposure and requires separate risk management.
For a generic discussion on buying process discipline, refer to How to Buy Unlisted Shares In India. For examples of companies at different lifecycle stages, refer to UA's Pre-IPO Research Catalogue for Unlisted Axis.
FAQs
Q: What is the lifecycle of an unlisted share in India? The lifecycle of an unlisted share in India involves seven phases: founder shares upon incorporation, seed and Series rounds, ESOPs allotted to employees, secondary transactions between early shareholders, dealer network operations that provide retail participation, filing of the DRHP with SEBI, and eventually listing on the stock market with the six-month SEBI ICDR Regulation 16 lock-in period. Retail participants generally come into play in phases 5 or 6. Each phase is governed by distinct pricing references, regulatory guidelines, and risk profiles.
Q: How long does it take for an unlisted share to list? Time taken from incorporation till IPO listing can vary a lot, from around 5 to 15 years depending on the industry, fundraising path, and corporate objectives. Time gap from the filing of DRHP (phase 6) to listing (phase 7) can take 6 to 9 months normally. Before DRHP filing, estimation of the timeline of the listing process remains highly speculative since IPO prioritization depends on various factors including market conditions and regulatory environment.
Q: What happens to my ESOP shares after the listing of a company? Once the company goes public, any ESOP shares which the employee had acquired becomes subject to the mandatory 6-month SEBI ICDR Regulation 16 lock-in requirement (for non-promoter pre-IPO shareholding). This means that during the lock-in period the shares cannot be sold on the exchange. Post-lock-in period ends (Day 181 post-listing), the shares will be freely tradeable just as any other equity holding on stock market. There will also be a change of taxation from Section 112 to Section 111A from the date of listing, with holding period starting from day of exercise of ESOP.
Q: Is it possible for me to buy shares directly from employees of a company? Yes, it is theoretically possible for you to buy shares from employees of a company through off-market transfer through CDSL/NSDL DIS. However, in practice it is not easy to find a buyer or seller willing to buy/sell directly to/from each other due to difficulties in matching buyers and sellers. Also, the transaction requires legal knowledge of how the contracts should be drafted and price discovery becomes challenging without dealer network.
Q: What is the difference between primary issue and secondary trade in unlisted shares? Primary Issue is where the firm issues equity directly to the investors (ESOP for employees, series rounds for institutional investors, IPO for the public), where the capital moves into the firm. Secondary Trade is where one existing investor sells out of some/all holdings to another investor, where the capital moves from the new investor to the exiting investor, not the firm. All pre-IPO dealer-network retail investor trades are usually secondary. Each have different pricing anchors and regulations.
Q: Which is the appropriate entry point for an individual investor in unlisted shares? An average retail investor would want to enter at either stage 5 (pre-IPO active, 12-24 months ahead of expected DRHP filing) or stage 6 (post-DRHP, 6-9 months ahead of expected listing). Stage 5 gives you better entry prices but takes longer to exit, while stage 6 gives you precise timings but gives you worse entry prices and lower expected gains. Entry Point selection varies based on individual investor horizon, risk tolerance, and company conviction.
Q: What documentation proves the holding of unlisted shares in each phase? Holding of the shares in each phase is evidenced by the holder’s dematerialized account with either CDSL or NSDL – the demat statement is the proof of ownership of shares. The chain of documents to be produced in each phase includes: founding allocation of shares (registered with MCA through form PAS-3 or INC-7 historic), funding round allocation of shares (PAS-3 + Investment Agreement), ESOP vesting (Exercise Notice + Demat credit), off market transfer of shares (off market DIS + contract note + bank entry), purchase through dealers’ network (contract note + bank entry + DIS).
Q: How does the price typically progress across the lifecycle of an unlisted share? In a successful organization, price tends to move upwards along the lifecycle, although not in a linear fashion. Shares of the founders will be available at par value (₹1- ₹10). Seed and Series rounds will establish a series of fair price levels that increase with the growth of the organization. Price levels of ESOP-trust buybacks tend to remain below those in open secondary transactions. Dealer-network prices of Stage 5 would be higher than those for ESOP-trust. Post-DRHP price level for Stage 6 will increase by 8-20% on filing.
Disclaimer: This is written for educational and informational purposes only. Nothing here constitutes investment advice or a recommendation to buy or sell securities. All data is sourced from publicly available information. Investments in securities markets are subject to market risks — please read all offer documents carefully before investing.
