Cliff (Vesting Cliff)
A waiting period before equity begins to vest, typically one year for employees and founders.
Definition
A vesting cliff is a period of time during which an employee or founder cannot vest any of their equity, followed by a larger vesting event. The most common structure is a one-year cliff, meaning that if someone leaves before completing one full year, they forfeit all their equity.
After the cliff period ends, vesting typically continues on a monthly or quarterly basis. This structure protects companies from giving equity to people who leave quickly while ensuring meaningful vesting for those who stay committed.
Why It Matters
- Employee Retention: Incentivizes key team members to stay through critical early period
- Equity Protection: Prevents equity dilution from short-term employees
- Investor Confidence: Shows proper governance and equity management practices
- Tax Benefits: Allows for 83(b) elections and favorable tax treatment
How Vesting Cliffs Work
Common Structure:
4-year vesting with 1-year cliff + monthly vesting thereafter
• Year 0-1: No vesting (cliff period)
• Year 1: 25% vests at end of year
• Year 1-4: Remaining 75% vests monthly (2.08% per month)
• Result: Full vesting after 4 years
Real-World Example
Startup Employee Example: Sarah joins a startup as VP of Engineering with 1% equity (10,000 shares). Her equity has a 1-year cliff and 4-year total vesting period.
If Sarah leaves after 11 months, she gets 0 shares. If she leaves after 13 months, she gets 2,500 shares (25% of her total). If she stays the full 4 years, she gets all 10,000 shares.
This structure ensures the company only grants equity to employees who demonstrate long-term commitment.