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What is Cliff Vesting? How does it work?

  • Written Written by Team Equity 01 March 2024 | 4 min read
  • Editor's Note :

    We delve into the intricacies of cliff vesting, shedding light on its significance in the realm of financial planning and employee benefits. Our exploration aims to demystify the concept of cliff vesting, offering readers a clear understanding of its mechanics and implications

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Not to be confused with Cliff period which is the time period between the ESOP grant date and the ESOP vesting start date, cliff vesting is a type of vesting schedule where in employee doesn’t acquire any stock options before a specific date. After that date, the stocks are 100% fully vested.

Before we go into the complete details of cliff vesting, how it differs from usual vesting schedules, and its benefits let’s take a small glance at the types of vesting schedules.

Types of Vesting Schedules

Though most companies usually follow gradual vesting, there are a few other types of vesting schedules HRs and employees must be aware of. Some of them include:

Now that you have some basic understanding of each of the vesting schedules, let’s dive into Cliff vesting specifically.

What is Cliff Vesting?

As mentioned above, it is a time-based vesting approach where an employee becomes fully vested in the options. Let’s compare it to usual graded vesting where granted stock options vest over 25% over a period of 4 years – with cliff vesting you get everything at the 4th year, none before.

For example, after a cliff period of a year, the cliff vesting for a 4-year period would look like this as compared to gradual vesting.

graded vs cliff vesting

The key difference with Graded Vesting

Though it sounds obvious, in addition to the actual schedule the key difference that a cliff vesting has with graded vesting is that employees wouldn’t receive any stock portion till the cliff vesting date. This means they would receive no benefit at the time of resignation.

Pros and Cons of Cliff Vesting

Let’s now talk about the why and the when. This can be easily done by understanding the pros and cons.

Pros of Cliff Vesting

Cons of Cliff Vesting

When should you employ cliff vesting for your organization?

Though it should be analyzed on a case-by-case basis, cliff vesting is usually a common practice by early-stage companies that want to incentivize employees to stay with the company through critical initial phases. It can be useful when:

Though this is not exhaustive, it depends on the stage of funding, age of startup, maturity of ESOPs, and many other factors to determine whether to go for cliff vesting or not.

How can Vega Equity help you in this journey?

We’ve helped companies of all sizes and facilities establish their ESOP platform while designing their customized vesting schedule to their requirements. This can greatly help realize the attractiveness of equity compensation and the effectiveness of their retention programs. Speak to us if you have any questions about the vesting process.

About Vega Equity

Vega Equity offers companies an effective, intuitive, and paperless platform for managing equity. It provides accurate cap table management, customized user experiences, and precise information. Additionally, it assists in measuring KPIs, analyzing data, and tracking performance towards goals.

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