Definition of Cliff Vesting
Cliff vesting is a type of employee vesting in which employees receive the right to receive equity in the company on a specific date. In contrast to other approaches in which employees are vested slowly, receiving shares over a prolonged period of time, cliff vesting occurs when the employee goes from having no shares to receiving their full allowance of shares on a predetermined date.
The idea of providing employees with equity in the form of shares is that it can help to incentivise them and to encourage them to do their best. The challenge is that employers need to demonstrate their loyalty to the company to be eligible for those shares, and that can take time.
Cliff vesting essentially allows companies to set a specific amount of time that people need to work for them before they become eligible to receive equity. For example, they may require people to stay with the company for two years, with the cliff date occurring exactly two years after the date on which they were hired.
Many employees are hesitant when it comes to cliff vesting, because it’s often perceived as risky. Even if the employee fully intends to wait until they reach the cliff, unforeseen circumstances can stop them from receiving their equity. They might need to move across the country to look after a relative or be terminated by the company.
Cliff vesting is particularly popular amongst start-ups because it acts as a gesture showing that the company values its employees while simultaneously protecting the company. The company will be able to test staff out before it fully commits to them, and it can stop people from joining start-ups purely to earn equity that they can later sell if the company goes public.
What’s the difference between cliff vesting and partial vesting?
Partial vesting allows employees to receive shares in chunks, rather than needing to wait until the date of their cliff. With partial vesting, an employee might receive 10% vesting every year and could leave the company after five years with their 50% vesting intact. With cliff vesting, an employee goes from 0% to 100% once they reach a predetermined date, and they’re not entitled to anything if they leave before they reach that date.
What’s the most common cliff vesting period?
In most cases, employers offer employees a four-year vesting period with a one-year cliff.
Is cliff vesting legal?
Cliff vesting is 100% legal, although it’s occasionally controversial. In some regions of the world, laws are in place that are designed to stop employers from forcing their employees to stay, and cliff vesting is seen by some as a form of manipulation. There have also been cases where employers have fired employees a day before they reach their vesting date to avoid having to provide them with equity.
