A vesting cliff, often just called a “cliff,” is a predetermined waiting period that an employee must pass before they are eligible to receive any of their vested equity (such as stock options or restricted stock units). Basically, it’s a “one-year-or-nothing” rule. If an employee leaves before the cliff period ends, they forfeit all of the equity that would have otherwise vested.
This is a common practice for startups and growing companies that offer equity to their employees. It’s a way for a company to protect itself and its founders from hiring someone who leaves after a few months, walks away with equity, and provides no long-term value.
How a Cliff Works
The most common cliff period is one year. After an employee completes their first year of service, all the equity that has accumulated during that year vests at once. From that point on, the rest of their equity typically vests on a monthly or quarterly basis over the remaining vesting schedule.
A typical vesting schedule is four years, with a one-year cliff. Here’s how it works:
- Year 1 (The Cliff): The employee accrues equity over the year, but none of it is officially theirs yet. If they leave after 11 months, they get nothing.
- After Year 1 (The Vesting Begins): On the one-year anniversary, the first 25% of their total equity vests immediately.
- Years 2-4 (Monthly Vesting): The remaining 75% of the equity vests incrementally over the next three years, usually on a monthly basis. For a 4-year schedule, this would be an additional 2.08% of the total equity each month.
A Quick Example
Let’s say a company grants a new hire 4,000 stock options over a four-year period with a one-year cliff.
- On their start date: 0 options are vested.
- On their one-year anniversary: 1,000 options (25% of 4,000) vest all at once.
- Every month after that: 83.33 options (2,000 ÷ 24) vest.
- At the end of year 4: The remaining options vest, and the employee owns all 4,000 options.
If that employee had resigned after 10 months, they would have walked away with nothing.