Cliff Vesting: Earning Your Equity Over Time
Cliff vesting is a common feature of equity compensation, particularly for employees and advisors of startups. It means that you earn a certain percentage of your equity grant after a specific period of time, often one year. Think of it as a waiting period before a portion of your shares become yours. This “cliff” is designed to encourage long-term commitment to the company.
Here’s a simple example: Imagine you’re granted 4,000 stock options with a one-year cliff and a four-year vesting schedule. After one year, you’d immediately vest in 25% (1,000) of your options. After the cliff, the remaining options typically vest gradually at regular intervals (e.g., monthly or quarterly) over the remainder of the vesting period. In this example, you’d then vest in 250 additional shares every quarter until fully vested four years from your grant date.
Why have a cliff?
- Alignment of interests: The company wants to ensure you’re committed to its success for a reasonable period, contributing your expertise and effort.
- Protection for the company: It prevents early departures from walking away with a substantial portion of equity after a short period.
- Motivation for employees: It encourages employees to contribute their full potential for long-term growth.
What happens if you leave before the cliff?
If you leave before the cliff vests, you typically forfeit all unvested options. This is an important consideration, especially if you’re thinking about moving to a different opportunity before the cliff date.
What happens after the cliff?
Once the cliff vests, you own that portion of your equity outright. If you leave the company after the cliff, you typically have a limited time (often 90 days) to exercise your vested options (purchase the shares). The specifics of your post-termination exercise window are outlined in your stock option agreement.
Different cliff periods: While one year is the most common cliff, some companies may have shorter or longer cliffs. It’s essential to understand the specific terms of your vesting schedule outlined in your grant agreement.
So here’s what we covered:
- What cliff vesting is and how it works.
- The rationale behind cliff vesting from both the company’s and the employee’s perspectives.
- What happens if you leave before or after the cliff vests.
- The importance of understanding your specific vesting schedule.
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