Cliff

A cliff is a waiting period at the beginning of a vesting plan before any shares are earned. Only once this period has fully passed does a first portion vest all at once. After that, further shares are released gradually over time. In venture capital the market standard is four-year vesting with a twelve-month cliff: after one year a quarter of the shares are earned, after which the vested portion grows monthly. The purpose is straightforward: someone who leaves in the first year should not retain a permanent stake, because dead equity on the cap table burdens future financing rounds and demotivates the remaining founders.

The mechanism applies both to founder shares, which are subjected to vesting retrospectively when an investor comes in, and to employee options. For founder shares already issued, transfer or redemption rights determine what happens to unvested shares on departure. For employee options, the plan determines when rights vest and under which conditions they can be exercised. Leaver provisions are closely connected, defining different reasons for leaving and their consequences. Restrictions on vested rights are subject to legal limits. Besides the length of the cliff, the usual negotiation points are accelerated vesting on an exit and whether work performed before the financing round is credited.

For company valuation the vesting status of key personnel is a review point in its own right. What applies during periods when someone interrupts their activity, such as parental leave or extended illness, also needs settling, because a rigid rule produces outcomes here that nobody intended. The treatment of a departing shareholder's shares matters equally in practice: they can be redeemed, distributed among the remaining shareholders or transferred into a pool for future employees, each with a different effect on ownership percentages.