Business
The Startup Vesting Cliff Explained
Learn what a vesting cliff is in a startup context. Understand how this common equity clause affects founders, employees, and stock option vesting.
What is it?
A vesting cliff is a common clause in startup equity grants. It defines an initial period, typically one year, during which an employee must stay with the company to earn any stock options. If they leave before this cliff, they get nothing. On their one-year anniversary, 25% of their total grant vests instantly. After that, vesting usually continues monthly over the remaining term, which is often four years in total.
Why is it trending?
The cliff is a standard mechanism to protect a startup and its investors. It ensures that equity, the company's most valuable currency, is only earned through demonstrated commitment. This prevents early departures from diluting ownership and rewards long-term contribution. By aligning team incentives with company longevity, the cliff creates the stability and dedication that venture capitalists look for, making the startup a more attractive investment.
How does it affect people?
For employees, the cliff acts as "golden handcuffs," creating a powerful financial incentive to stay for at least one year. Leaving before the cliff means forfeiting their entire potential equity stake. For the company, this ensures a more stable workforce and protects its ownership structure (cap table). It guarantees that only committed team members become part-owners, which is crucial for morale and future fundraising efforts.