Vesting cliff is a term used in the context of employee equity compensation plans, particularly stock options and restricted stock units (RSUs). It refers to a period of time that an employee must wait before they can start vesting (i.e., gaining ownership) of their stock options or RSUs.
Typically, a vesting cliff is set at the beginning of an employee's tenure, and it is a threshold that must be reached before the employee is eligible to begin vesting. For example, if an employee is granted 1,000 stock options with a four-year vesting schedule and a one-year cliff, they will not be able to vest any of those options until the one-year cliff is reached.
At the end of the cliff period, the employee will be able to vest a portion of their options or RSUs, based on the vesting schedule agreed upon. The purpose of the vesting cliff is to encourage employees to remain with the company for a set period of time, typically one year, before they can begin to gain ownership of their equity compensation.
If an employee leaves the company before the vesting cliff is reached, they typically forfeit any unvested stock options or RSUs. However, if the employee stays with the company until the cliff is reached, they will have the opportunity to start vesting their equity compensation on a predetermined schedule, usually on a monthly or quarterly basis.
Vesting cliffs can be beneficial to both the company and the employee. They help to incentivize employees to remain with the company for a certain period of time, which can help to reduce turnover and improve employee retention. For the company, vesting cliffs can also help to ensure that equity compensation is awarded to employees who are committed to the long-term success of the company.