Cliff vesting

What it means

Vesting spreads a grant of equity over time so that it is earned rather than handed over. A cliff is the part at the beginning where nothing is earned at all, followed by a single day on which the whole of that period vests at once. The standard shape is four years with a one year cliff: leave after eleven months and you have nothing, stay until the first anniversary and a quarter of the grant vests on that date, and the rest accrues monthly from there. It applies to founders as much as to employees, and for founders it usually takes the form of shares that are already issued which the company can buy back if they leave early.

Why it matters

For an employee it makes one date worth more than any other date in the grant. Month eleven and month twelve are separated by a quarter of everything, which is why the anniversary is worth knowing before a resignation and before a difficult conversation with a manager. For a founding team it does something more important: it is the only thing standing between the company and a co-founder who leaves in month three holding a third of it forever. That person then owns a block that cannot be given to whoever replaces them, cannot be sold, and sits on the cap table through every future round. Investors ask about founder vesting for exactly this reason, and a team that already has it is answering the question before it is put.

Worked example

You are granted 48,000 options over four years with a one year cliff, vesting monthly after it. Nothing at all is earned for eleven months. On the first anniversary 12,000 vest in a single day, and 1,000 vest each month after that, so at eighteen months you hold 18,000 and at four years the whole 48,000. Leave at month eleven and you leave with nothing, having done eleven months of the work. The founder version uses the same arithmetic on shares you already hold. Three founders split a company 40, 30 and 30 on four year schedules with one year cliffs. The one holding 30% leaves at month nine, before their cliff, so the company buys all of it back and the split becomes roughly 57 and 43 between the two who stayed. Without vesting that person keeps 30% of everything the other two build afterwards.

The common mistake

Two of them, and they belong to different people. Employees read the cliff as a probation period and assume a manager can waive it, which no manager can: it is in the plan rules and it moves for nobody. Founders make the more expensive one, which is agreeing a split at the kitchen table and putting no vesting on it at all, because vesting between friends feels like an accusation. It is the opposite. It is the thing that lets all of you leave for a reason that is nobody's fault without one person being punished for it, and it is far easier to agree in the first month than in the month somebody is thinking about going.

In practice

Employee cliffs live in the plan rules rather than in the offer letter, so the offer can be silent while the cliff is real. Founder vesting is usually put in place at the first priced round because investors ask for it, and putting it in earlier is better and cheaper: at the seed stage it is a document between founders, and at the round it is a negotiation with somebody whose interests are not yours. The start date matters more than people expect. A schedule that runs from the date of the financing rather than from the date somebody actually started can quietly delete a year of work, and backdating it to the real start is a normal request rather than a cheeky one. Bittern models this as a schedule over shares somebody already holds, which is what a founder arrangement usually is: they own all of it from the start and the schedule says what they would keep if they left today.

What to ask

Ask what date the schedule runs from, and get it in writing, because the difference between your first day and the day the paperwork was signed can be a year of the grant. Ask what happens if you are let go the day before the cliff, since some plans vest nothing and some vest pro rata for a good leaver, and the answer is in the plan rules rather than in anybody's intention. Ask whether there is acceleration on a sale, which is a separate clause and is often absent. If you are agreeing a founder split, ask the harder version of the same question of each other: what happens to the shares of whoever leaves first, who decides whether they were a good leaver, and at what price the company can buy those shares back. Write the answers down while everybody still likes each other, because the conversation is available now and will not be available later.

Related terms

• ESOP vs VSOP Real options over real shares against a contractual right to a cash payment. The difference is who pays tax, when, and whether you need money to take part.
• Double trigger acceleration Unvested equity vests early only if two things happen: the company is acquired and you are then let go.
• Fully diluted shares The share count that assumes every option and every convertible has already converted. The only number worth quoting.