Startup Dictionary
Cliff
Definition
A period of time (often one year) that an employee must work before their equity grants begin to vest.
Deep Dive
In the context of equity compensation, a "cliff" refers to a predefined period an employee must work before any of their granted equity (such as stock options or restricted stock units) begins to vest. The most common cliff period is one year. If an employee departs from the company before reaching this one-year milestone, they forfeit all their equity grants entirely, receiving no shares. This mechanism is designed to incentivize long-term commitment and align employee interests with the company's sustained success.
Examples & Use Cases
- 1An employee is granted stock options with a 4-year vesting schedule and a 1-year cliff. If they leave after 11 months, they receive no shares.
- 2If the same employee stays for 13 months, they immediately vest 25% of their total options (the portion covering the first year), and then continue to vest monthly for the next three years.
- 3A startup founder's equity agreement might include a longer cliff, such as two years, to ensure robust commitment and accountability among the founding team.
Related Terms
Vesting ScheduleEquity GrantStock OptionsRetentionRestricted Stock Units (RSUs)