Editor's Note:-Explore the complexities of what is cliff vesting, highlighting its importance for employee benefits and financial planning. Our investigation is to provide readers with a comprehensive grasp of the principles and effect of cliff vesting by demystifying the idea.
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.
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.
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.
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.
Let’s now talk about the why and the when. This can be easily done by understanding the pros and cons.
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.
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.
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