What Does Cliff Vesting Mean?
Cliff vesting is a type of vesting where employees get 100% ownership in an equity, retirement or pension plan on a specified date or after a predefined milestone. Vesting is a legal term describing access to full rights and entitlement to benefits provided by an employer. Cliff vesting differs from normal (or regular) vesting which is where ownership is acquired gradually.
Often, when a company offers equity as part of employee compensation, ownership of this equity is contingent on the employee waiting a specified period to ensure performance and loyalty. Cliff vesting gives startups the ability to offer a token of its profits and growth to its most prized employees. It serves as a probation window where the company can assess an employee’s value and contribution before conceding equity.
For example, if an employer offers 5-year cliff vesting, the employee has zero ownership for the first four full-years of service. At the end of the fifth year, full ownership of the benefits is transferred to the employee. The employee may lose all benefits if they leave the company, are fired or the company fails before the date.
The cliff period is not always identical across one organization. It can be customized for different teams or individual employees. Also, once the employee is vested, plan policy execution may differ depending on the nature of the benefit received.
While cliff vesting is most often time-based, it may be milestone-based as well. Milestone-based vesting is contingent on the employee fulfilling a predefined goal such as completing a long complex project or taking the company public.