A cliff is the initial waiting period in a vesting schedule during which no shares or options vest, after which a significant portion vests at once if the individual is still with the company. It is most commonly used in founder and employee equity arrangements to ensure that ownership is earned over time, not granted immediately.
In startup compensation, the cliff is a structural safeguard. It prevents someone from joining briefly, receiving equity, and leaving with a permanent stake before contributing meaningful value.
Cliff meaning
The cliff’s meaning in equity arrangements centres on commitment and protection. A common cliff definition is a one-year cliff within a four-year vesting schedule, where nothing vests until the first anniversary of the start date. At that point, a defined percentage, often 25%, vests immediately.
If the individual leaves before the cliff ends, they typically receive no vested equity at all.
In practice, the cliff stands for safeguarding the company from awarding ownership to short-term contributors while rewarding those who remain and help build long-term value.
How a cliff works in a typical vesting schedule
The most common structure looks like this:
- Total vesting period: 4 years
- Cliff: 12 months
- Vesting after cliff: 25% vests at the 1-year mark
- Remaining 75%: vests monthly or quarterly over the following 3 years
Example:
An employee is granted 40,000 options under a four-year schedule with a one-year cliff.
- Months 0–11: 0 options vested
- Month 12: 10,000 options vest (25%)
- Months 13–48: Remaining 30,000 vest gradually
If the employee leaves at month 10, they walk away with nothing.
If they leave at month 18, they keep only the portion that has vested.
Why do companies use a cliff
Protecting the cap table
Equity is scarce and valuable. A cliff ensures that ownership remains aligned with sustained contribution, not short-term participation.
Reducing “dead equity”
If someone departs very early without a cliff in place, they may retain equity despite minimal contribution. That can complicate future fundraising and distort incentives.
Signalling long-term commitment
Investors expect structured vesting, particularly for founders. A cliff demonstrates that equity is tied to continued involvement and performance.
Cliff is the founder of the arrangements
Cliffs are not only for employees. Founder vesting schedules often include cliffs as well, particularly in venture-backed companies.
Even if founders incorporated the company together, investors frequently require founder shares to be subject to vesting with a cliff. This reduces the risk that a departing founder retains a large ownership stake without ongoing involvement.
Cliff vs vesting: what’s the difference?
- Vesting is the broader process of earning equity over time.
- Cliff is the initial “all-or-nothing” period before any vesting occurs.
The cliff does not replace vesting; it delays the first vesting event to ensure meaningful commitment.
Practical considerations
When designing a cliff, founders should consider:
- Industry norms (one year is common but not mandatory)
- Role seniority and recruitment competitiveness
- Interaction with good leaver/bad leaver clauses
- Alignment with fundraising expectations
Cliffs are most effective when they are transparent, clearly documented in option plans or shareholders’ agreements, and consistently applied across the team.
Ultimately, the cliff is about fairness: it rewards sustained contribution and protects the long-term health of the company’s ownership structure.
How UndoCapital supports vesting structures
Undo Capital helps founders design vesting schedules with cliffs that balance team retention, fairness and investor expectations. This includes structuring founder and employee equity with appropriate cliff periods, aligning vesting with growth milestones, and ensuring consistency across shareholder agreements and option plans, so equity rewards long-term contribution without creating future cap table or governance issues.
FAQs
What is a Cliff in a vesting schedule?
A Cliff is an initial period during which no shares vest. Once the cliff period ends, a portion of equity vests at once, followed by gradual vesting over time.
Why is a Cliff used?
It ensures founders or employees commit to the company before earning equity, reducing the risk of early departures.
What happens if someone leaves before the cliff?
They typically forfeit all unvested shares and receive no equity.
How long is a typical cliff period?
Most commonly, cliffs last 12 months, though this can vary depending on company agreements.
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