What is Cliff Period? Is it Mandatory? Understand details

  • Written Written by Team Equity 04 March 2024 | 4 min read
  • Editor's Note :

    Understand what a cliff period is, how it is relevant for vesting, and know why it is important.

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Not all good things can be achieved in 5-mins (Maggi is an exception!).

In the context of ESOPs, the wait time varies based on parameters like cliff period, vesting period, and exercise period. We’ve previously discussed about vesting and exercise in detail, so let’s take a look at cliff period today.

P.S. It is definitely more than 5 mins!

What is cliff period in ESOPs and why is it relevant?

Cliff is the time period between the ESOP grant date and the ESOP vesting start date during which the ESOP holder cannot vest their options or gain full ownership of their shares.

Companies usually set a cliff period for their options so as to incentivize employees to stay with the company for a fixed period of time before the ESOPs start to vest. It shows the employers that you are committed to the company.

Once the cliff period is over, the employee has the right to receive the allocated shares. These allocated shares are vested as per their schedule or can be accelerated – based on the company’s ESOP policy.

A simple analogy to understand: Getting ESOPs is like planting a tree. You can’t expect the harvest the moment you plant a seed. You need to ensure that the seed is planted at adequate depth which is like the waiting period of Cliff, and the gradual growth can be seen as vesting, while the fruition can be seen as wealth creation after liquidation.

4 years vesting schedule

What is the mandatory cliff for ESOPs in India?

Yes, if your company is registered in India there is a mandatory period for cliff. Under the Indian Companies Act, 2013, the mandatory period is a one-year gap between the granting and vesting of ESOPs.

When does it start: The mandatory cliff starts from the grant date. This is important for people who receive ESOPs as a part of their incentive compensation as they might wrongly believe that the date of cliff is one year after the date of their joining. Please check your Grant letters carefully.

How is the cliff relevant to vesting?

The vesting starts once the cliff period ends. Therefore the time of the cliff plays an important role. In addition to the one-year cliff, some companies might choose to have an additional year or two for the cliff if they want to defer their vesting. Other companies might choose accelerated or cliff vesting if they want to provide the stocks sooner or later.

Some key terms about vesting and cliff to know about

You can find the complete details and how it is different from other vesting in our detailed blog about cliff vesting.

How to track the cliff period?

The exact details of your cliff period, including its length and starting date, will be clearly outlined in your ESOP grant agreement. Make sure you have a copy and refer to it for specific information.

grant letter details

With Vega Equity, employees not only track the value created through options but view in a glance all the details regarding:

Schedule a free demo: with us today to view how our ESOP dashboard looks like

Bonus: FAQ about Cliff period

Does an employee still receive shares if he/she leaves before cliff period?

If an employee leaves the company before the cliff period is over, they will forfeit all of those benefits. Since the options allotted to them are not even vested at this point, they would have no right to them.

Does an employee have to pay taxes during cliff?

No, you need not pay any tax during the cliff. You’ll need to pay them at the time of exercise and liquidation events like buyback or sale.

Taxes during cliff

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