Why does Vesting and the Cliff matter?
Without it, a co-founder or early employee who leaves after two months keeps a full stake forever, commonly called dead equity, while the people who stay and do the remaining years of work see their eventual ownership diluted by someone no longer contributing anything. The cliff exists specifically to handle the case that reveals itself fastest: a founding relationship that clearly is not working within the first year. Every investor expects to see standard vesting on founder shares before they will fund the company, because they are effectively asking the same question a departing founder's equity would otherwise leave unanswered.
What does Vesting and the Cliff look like in practice?
A typical structure vests equity over four years with a one-year cliff: nothing vests before month twelve, then a quarter of the grant vests at once, and the remainder vests monthly or quarterly over the following three years. Suppose a co-founder leaves at month nine, under this structure, none of their equity has vested, and it returns to the company rather than staying with someone no longer working on it.
What are the common mistakes with Vesting and the Cliff?
- Founders skipping vesting on their own shares because they trust each other, then having no recourse when one leaves early.
- Setting a cliff shorter than a year, which pays out equity before there is enough evidence the fit is real.
- Forgetting to negotiate acceleration terms for what happens to unvested equity if the company is acquired.
- Applying vesting to founders but not to early key employees who hold meaningful equity.
Related concepts
- Co-Founder Equity SplitHow ownership of the company is divided among the founding team at the outset. A decision made with the least information a company will ever have about who contributes what.
- Vesting Acceleration (Single vs. Double Trigger)A contract term that speeds up unvested equity vesting when a company is acquired: single trigger accelerates automatically on the acquisition itself, double trigger requires both the acquisition and the person's termination or demotion afterward.
- Employee Stock Option Pool (ESOP)A block of equity set aside, and typically expanded before each priced financing round, to grant stock options to current and future employees without renegotiating ownership every time someone is hired.