What is a Vesting Cliff?

A cliff is a specific mechanism found in stock option agreements and equity grants. It defines a period of time that an employee, advisor, or founder must work for the company before they actually own any of their shares.

Think of it as a probationary period for equity.

In the startup world, cash is scarce, so equity is the primary currency used to attract talent. However, giving away ownership of your company is permanent. Once someone owns a piece of the business, it is very difficult to get it back.

The cliff exists to solve a specific problem. What happens if you hire a senior executive, give them a massive stake in the company, and then realize two months later that they are a terrible fit? Without a cliff, they would walk away with a permanent slice of your company for very little work.

With a cliff, they walk away with nothing.

The industry standard for employee equity is a four-year vesting schedule with a one-year cliff. This is often written as “4-year vesting, 1-year cliff.”

Here is how the math works.

Imagine you grant an employee 48,000 shares. Over four years, this averages out to 1,000 shares vesting per month. However, nothing vests during the first 12 months.

• If the employee quits or is fired at month 11, they have vested 0 shares. They leave with nothing.
• If the employee stays for 12 months and one day, they cross the cliff. At that moment, all the shares that would have accrued over the last year vest at once. They instantly own 12,000 shares.

After the cliff is crossed, the remaining shares typically vest monthly or quarterly for the rest of the four-year period. The cliff is the hurdle. Once you clear it, the equity flows smoothly.

Founders often think cliffs are only for employees. This is a mistake. Investors will almost always require founders to have a cliff as well.

This usually takes the form of “reverse vesting.” The founder technically owns their shares upfront, but the company has the right to repurchase unvested shares if the founder leaves.

This protects the company from a co-founder breakup. If you start a company with a partner and split the equity 50/50, you are taking a massive risk. If your partner quits three months in to go back to their corporate job, they shouldn’t keep half the company. A cliff ensures that if a co-founder leaves early, their equity returns to the pool so it can be used to hire their replacement.

The cliff is a tool for alignment. It ensures that everyone on the cap table has committed a meaningful amount of time to the venture.

However, there are exceptions. Advisors often receive smaller grants with shorter cliffs or no cliffs at all, as their contribution is often front-loaded. Some companies effectively waive the cliff for very senior hires, though this is risky.

Founders must decide how strict to be. Is a one-year cliff fair for a contractor converting to full-time? What happens to the cliff if the company is acquired six months after hiring? These are questions that should be answered in the stock option plan long before the situation arises.

The cliff forces a long-term mindset. It filters out those looking for a quick flip and rewards those willing to build.