What is Cliff Vesting?

Cliff Vesting is the term that refers to the situation where an employee vests fully on a specific day rather than in increasing amounts over time.

The moment the employee becomes eligible to receive any benefits under the retirement or stock option plans of their employer, they become “vested.”

Under the normal 4-year vesting period with a 1-year cliff, it is not always the case that the individual will vest after the 1-year cliff period. He can vest 25 percent after 1 year and 75 percent over the next 3 years.

How Cliff Vesting Typically Works

The standard vesting schedule for startups is four years with a one-year cliff:

• Before the cliff (months 0 to 12): The employee will not own any vested shares, no matter how long the employee has been in service.
• Hitting the cliff (month 12): 25% of the whole option pool vests immediately.
• Post-cliff (months 13 to 48): The remaining 75% is generally vested monthly over the next three years. 

Why Does a Startup Adopt the Cliffs of Equity?

In a startup, cliff vesting is one strategy used in an effort to motivate employees to stay with the organization. The adoption of cliff vesting means that any employee must be at the organization for a certain amount of time before getting any vested equity.

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