3-Year Cliff or 4-Year Cliff
The plan is considered as completely vested when they have stayed with the company for the whole duration of the vesting schedule and have received all the shares.
In most vesting schedules, there is often a one-yearor two-year cliff period. These vesting schedules are placed on shares offered to an employee or any new shareholder. This means that the person would get the shares in parts over a period of time as they fulfill the requirements of the vesting plan. The plan is considered as completely vested when they have stayed with the company for the whole duration of the vesting schedule and have received all the shares. With this said, vesting plans often have a cliff period, where a portion of shares is vested at one specific time rather than in increasing amounts over time. To explain better, let us take an example: Kevin is offered 4,800 shares as equity compensation in the company on a vesting schedule that lasts 4 years, where he would get a part of the shares every month. This means that Kevin will get 100 shares every month (4,800 / 4 years = 1,200; and 1,200 / 12 months = 100). When cliff vesting comes into question, the employee gets the complete number of shares all-together after the cliff period. That is, 100% of the shares are vested all-together at once. There are different kinds of cliff periods, where a one-year cliff is normally used for 25% of the shares in the vesting plan. But other than that, there is the 3-year and 4-year cliff period. If a vesting plan is made with just a cliff in it, then this is how it will be:
- 3-year cliff vesting: A participant is 100% vested after 3-years of vesting service
- 4-year cliff vesting: A participant is 100% vested after 4-years of vesting service
To put it in a table:
| Amount of shares vested in: | ||
|---|---|---|
| Years of Vesting Service | 3-Year Cliff Plan | 4-Year Cliff Plan |
| 1 | 0% | 0% |
| 2 | 0% | 0% |
| 3 | 100% | 0% |
| 4 | – | 100% |
This means that after the cliff period ends, the complete number of shares are offered to the participant. If the person leaves the company before the shares are completely vested, they would not get any retirement benefits in a cliff-vesting plan. If you want to learn more about the cliff and various cliff periods, check out our blog or knowledge center here. And if you have not yet started using Eqvista as your cap table application, it’s time to do so. Check out our cap table software here & contact us today!
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