Vesting cliffs represent a period of time before equity, outlined in a vesting agreement, begins vesting to an individual. Vesting cliffs are typically one year in length, and are most practical for startups looking to set effective equity compensation through vesting schedules with a cliff. Vesting cliffs are usually put in place to incentivize early founders, employees, and advisors of a startup to stay for at least 1 year.
The cliff represents the moment where vesting equity up until that date is distributed to the member of the equity compensation vesting agreement. No equity is vested until the vesting cliff, at which point an individual vests
(receives) an amount of equity they would have earned prior to the cliff in a standard equity vesting agreement. After the cliff, vesting generally occurs pro-rata (proportionally) on a monthly basis according the the vesting agreement.
For example, an employee is granted 4800 options, vesting equally over 4 years with a one-year cliff. On a pro-rata basis, the employee should vest 100 options per month. However, with a one year cliff the employee vests no equity until their one year anniversary. On that date, they vest 1200 options, the amount they would have vested pro-rata in the first year of employment. After that date they vest 100 options per month.
Vesting cliffs are used as a legally binding method of ensuring zero acceleration (no vesting of equity) of vesting agreements when certain agreed upon conditions are met. The most common reason for zero acceleration in a vesting agreement is when a member of a vesting agreement with a vesting cliff, such as a founder, employee, or advisor, quits before the vesting cliff is reached.
In events where the conditions for a single-trigger acceleration event are met an agreed upon percentage, typically 25-100%, of unvested equity is vested immediately. In the case of single-trigger acceleration events occurring before the vesting cliff is reached, both participating parties need to have an agreed upon acceleration agreement of the vesting schedule.
This does not change the vesting period, however, it does change the amount of vested and unvested shares in relation to each-other; the individual will now have more vested shared and less unvested shares compared to before the occurrence of a single-trigger acceleration event.
In events where the conditions for a double-trigger acceleration event are met event are met an agreed upon percentage, typically 50-100%, of unvested equity is vested immediately. In the case of double-trigger acceleration events occurring before the vesting cliff is reached, both participating parties need to have an agreed upon acceleration agreement of the vesting schedule.
This does not change the vesting period, however, it does change the amount of vested and unvested shares in relation to each-other; the individual will now have more vested shared and less unvested shares compared to before the occurrence of a double-trigger acceleration event.
