Startup compensation often includes equity, such as stock options or Restricted Stock Units (RSUs), offering employees a potential ownership stake. The structure governing when this equity is earned is standardized. For most early-stage companies, the 1-year cliff is a fundamental term. Understanding this mechanism is important for any employee evaluating a compensation package that includes stock.
Understanding Equity Vesting
Equity vesting is the process by which an employee transitions from being promised a grant of shares to actually earning ownership of those shares over time. This mechanism prevents employees from receiving a large grant of stock upfront and then immediately departing. Instead, a grant agreement establishes a schedule for when the employee’s right to the equity matures.
The vesting process ensures the employee provides sustained service in exchange for the equity. Common forms of equity subject to vesting include stock options, which grant the right to purchase shares at a set price, and RSUs, which are a promise to deliver actual shares once conditions are met.
Defining the 1-Year Cliff
The 1-year cliff is an initial gateway that dictates the first moment an employee can claim any portion of their granted equity. It is an “all or nothing” stipulation: if an employee leaves before reaching their 12-month anniversary, the vesting clock effectively resets. During this first year, the equity is “unvested,” meaning the employee holds a conditional promise but has no legal right to the shares.
Reaching the 12-month mark triggers the vesting of the first significant portion of the total equity grant. If the employee departs before that date, they forfeit 100% of the granted shares, resulting in zero vested equity. This mechanism ensures a minimum commitment from new hires before ownership is transferred.
How the Cliff Mechanism Works
The practical application of the cliff can be demonstrated using an example. Consider an employee who accepts a grant of 40,000 RSUs scheduled to vest over four years. If this employee leaves the company at 11 months and 29 days, the entire grant of 40,000 RSUs remains unvested and is returned to the company’s equity pool. Their service did not meet the minimum time requirement established by the cliff.
The outcome changes dramatically on the 12-month anniversary date, marking the successful completion of the cliff period. On this day, the employee vests the first portion of their grant, typically 25% of the total shares. For the employee with 40,000 RSUs, 10,000 shares vest immediately and become their property. The cliff acts as a large, single-day lump-sum vesting event that releases the initial quarter of the total grant.
Standard Vesting Schedules Following the Cliff
Once the initial 1-year cliff is successfully passed and the first 25% of the equity has vested, the remaining 75% is released incrementally over the subsequent three years. This structure is commonly known as a “4-year vesting schedule” and is the industry standard for most technology and startup companies. The remaining shares are usually released to the employee on a monthly or quarterly basis, referred to as “continuous vesting.”
If the schedule dictates monthly vesting, the employee vests 1/48th of the total grant each month for the remaining 36 months. Quarterly vesting follows a similar pattern but in larger batches. Specialized employment agreements, often for executives, might include “accelerated vesting,” where equity vests immediately upon a specific event like a company acquisition, but these clauses are rare for general employees.
Why Companies Use a 1-Year Cliff
Companies use the 1-year cliff primarily for talent retention and commitment filtering. The first year involves significant investment in training and integration, and the cliff incentivizes employees to remain long enough to become productive. Linking the initial equity payout to a full year of service ensures a higher degree of commitment from new hires.
The cliff also protects the company’s finite equity pool from dilution by short-term employees. If employees could leave after a few months with vested shares, the pool would quickly deplete without a long-term service benefit. Furthermore, the 1-year cliff aligns with common regulatory guidelines, such as those related to qualified stock options, which often require a minimum holding period for favorable tax treatment.
Negotiating Equity and the Cliff
Job candidates should understand that the 1-year cliff itself is rarely negotiable, especially for an initial equity grant at a startup. Since the cliff is a standardized policy for retention and administrative simplicity, companies are resistant to making exceptions. Attempting to negotiate the removal or shortening of the cliff may signal a lack of long-term commitment, potentially impacting the offer process negatively.
A more productive approach involves negotiating the total size of the equity grant, which directly impacts the value received after the cliff vests. Candidates can also inquire about the vesting frequency after the cliff, potentially seeking a monthly schedule instead of a quarterly one to receive shares sooner. Highly experienced or senior candidates may have more leverage to negotiate a modified structure or accelerated vesting terms, but this is the exception.