One-Year Cliff

Many technology companies pay their employees not only a salary but also promise them a small stake in the company on top of it. This stake, however, is not handed over immediately. It is unlocked gradually over several years, usually over four years. And in the first year, nothing happens at all at first: anyone who resigns or is let go before that gets absolutely nothing. Only on the first anniversary does the lock spring open, and a quarter of the promised shares truly belong to the person. This drop-off at the end of the first year is called the one-year cliff, after the English word for a rock face.

Why companies build in this cliff

Shares in the company are a substitute for cash for young companies. A start-up can rarely pay the salaries that a large corporation offers. Instead, it offers a piece of the possible future. So that this promise doesn’t fizzle out, it is meant to be tied to loyalty.

The cliff solves a concrete problem here. Without it, someone could stay for three months, leave again, and still be a permanent co-owner. If the company were later sold, this person would profit along with everyone else, despite having barely contributed anything. For founders this is doubly annoying, because every share granted shrinks their own.

A year is also considered a workable probationary period. During this time it becomes clear whether someone fits into the team and whether the collaboration works. For employees, this has an unpleasant flip side. Anyone who realizes in month eleven that the job isn’t right for them often grits their teeth for a few more weeks so as not to narrowly miss the cliff.

From the cutoff date to the last installment

The gradual unlocking of shares is called vesting in English. A typical contract reads: four years vesting, one year cliff, monthly thereafter. Translated, this means the following. In total, the shares are fully vested after four years. In the first year, everything is locked. On the anniversary, 25 percent is released all at once. After that, roughly one forty-eighth is added each month.

A worked example makes this tangible. Someone is promised 4,800 shares over four years. Resigning after eleven months means: zero shares. After exactly twelve months: 1,200 shares. After 18 months it’s 1,200 plus six monthly installments of 100 each, so 1,800. The jump on the cutoff date is thus real and substantial.

An important distinction is often muddled here. Unlocked does not mean paid out. The shares do belong to the person permanently, but they usually can’t simply be sold. As a rule, they only turn into money once the company is sold or goes public. Until then, the value is merely a figure on paper.

Cliffs in job listings and acquisition news

Most directly, one encounters the cliff in the employment contracts of technology companies. Job postings contain phrases like equity, stock options, or RSUs. Behind this lies almost always a vesting plan with a cliff. The clause is negotiable, but the combination of four years with a one-year cliff is the standard that nearly everyone follows.

The topic also comes up in business news. When a large AI company poaches a small team, there is often talk of compensation payments. The new employer then replaces the shares that are forfeited upon the switch. Conversely, media report on waves of resignations shortly after major vesting dates, because many employees can then decide freely at the same time.

A common misconception holds that the cliff only protects the company. It also creates clarity for both sides, because the date is fixed in advance. Anyone evaluating such an offer should nevertheless stay level-headed. Most start-ups fail, and then the shares are worthless, no matter how long someone stayed.