In short
The initial period in a vesting schedule during which no shares vest until a minimum period has passed, after which the shares accrued to that date vest at once.
A cliff is the waiting period at the start of a vesting schedule. A person who leaves the company before it ends earns no shares. When it ends, the shares accrued to that date vest at once, and vesting then continues in monthly or quarterly instalments.
How It Works
The most common structure is four-year vesting with a one-year cliff. Under this structure:
- A person who leaves within the first 12 months earns no shares,
- At the end of month 12, a quarter of the shares vest,
- The remaining shares vest in equal monthly instalments over the next 36 months.
The cliff prevents the company from giving shares to people who leave shortly after joining. It allows a reasonable period to see whether a person fits the team.
Founders, Employees and Advisers
- Founders: In a funding round, the investor may agree to shorten or waive the cliff, taking into account the time founders have already spent in the company.
- Employees: The cliff is a standard element of employee stock option plans.
- Advisers: Three- or six-month cliffs are usually used for short-term relationships; see Advisor Equity.
Points to Watch
- Sale of the company: What happens if the company is sold during the cliff, that is, whether acceleration also covers the cliff, should be regulated clearly.
- Termination by the employer: Terminating an employee’s contract before the cliff ends may lead to disputes, especially if done solely to prevent shares vesting. For such cases, which carry risk under the principle of good faith, the plan may separately regulate termination without a valid or just cause.
- Type of departure: What happens to shares earned by a person leaving after the cliff is determined by the leaver provisions.
Frequently Asked Questions
Does an employee who leaves before the cliff receive no shares at all?
As a rule, yes; a person who leaves before the cliff ends earns no shares. However, the plan may provide that the cliff does not apply in cases such as termination without cause or a sale of the company. These exceptions should be written clearly from the outset.
Is the cliff always one year?
No, that is a market standard. For senior executives or founders whose prior work is taken into account, the cliff may be shortened or waived; advisers usually have a shorter cliff.
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