Cliff Vesting

Cliff vesting is a benefits or equity compensation structure where an employee must work for a company for a minimum, continuous period (the “cliff”) before any stock options, restricted stock units (RSUs), or retirement benefits become vested or claimable.

Common Scenario:

• One-Year Cliff: No equity is vested if the employee leaves before completing one year. After the first year, a portion (typically 25%) of the equity vests, with the remainder vesting incrementally over subsequent years.

Why Companies Use It:

• Encourages employee retention.

• Protects against turnover-related equity dilution.

• Aligns employee incentives with long-term company performance.

Example:

An employee granted 4,000 stock options with a 1-year cliff and 4-year vesting would receive no options if they leave before 12 months. At the 12-month mark, 1,000 options would vest.