Cliff vesting is the process where an cliff is fully vested on a given date and receives their full stock of the retirement plan on a specific date. Cliff vesting is the process where an employee gets fully vested on a given date. The employee receives his or her full benefits of the retirement plan on a specific date instead of in amounts over time. The "cliff" described is the date stock which you become fully vested. A four-year vesting schedule with a one-year cliff is common. Cliff vesting is the way that employees of a company can acquire full ownership of incentives or assets of the company's qualified retirement plan account on a specific, agreed-upon date, instead of over a longer period. This period cannot exceed six years. The "cliff" is usually one year in. Companies put vesting schedules in place as a way to handle pension or retirement plans. There are other assets and benefits that can be specified. But they must meet the minimum vesting standards that the IRS outlines. These schedules are often used as a way to reward loyal employees. They have a large impact on the employee's equity package and how vesting it can be worth. Vesting means that instead of receiving our money or assets immediately, we get them over a period of time. It is common to receive them over four years. The equity package an employee receives can be generous, but he or she should finish his or her vesting schedule. Otherwise, the employee could lose his or her benefits. Nonforfeitable rights are dependent on the length of time an employee has worked with the company. Cliff vesting does not pay out partial benefits. Cliff vesting allows you to try out a partnership without having to commit right away. You will agree upon the amount of equity and the length of your vesting schedule. But it wouldn't apply if you left the company before the end of the cliff period. Let's say Sally works at Company X, which participates in a qualified retirement plan. Her plan lets her contribute up to 7 percent of her annual salary, before taxes. Company X will match Sally's contribution up to 7 percent of her pre-tax salary. The way vesting works depends on the included assets, such as stock or options. When we speak of options, this means you can be given a certain amount of options, which will not be available until you vest. Once you vest, you will have the option to purchase certain shares at a specific price during a pre-specified time. Once you are vested, stock is issued to you in its entirety. You own all of it. However, any unvested amount is available for the company to repurchase. Cliff vesting is the provision of vested benefits at a certain date. A vested benefit is an incentive that employers can offer their employees. It is usually financial. This benefit can give employees incentive to become part of the company long-term. It creates an environment of loyalty and decreases turnover. Options represent "value" and "compensation" without a need to issue actual shares. The importance of cliff vesting options lies in the fact that the cliff vesting period can be formed with a specific event in mind. Vesting can have some drawbacks. One is that many people can each own a percentage of the company. This makes legal processes more difficult in the long run, and it is what cliff cliff was designed to solve. Cliff vesting creates uncertainty for an employee. They take a chance that their employer may fire them before the cliff vesting date. Sometimes if an employee is average and closer to the cliff vest date, management may decide to let him or her go. It is especially uncertain when signing on to a startup. The reason being is because many startup companies tend to fail within the first three years. Cliff vesting can be problematic if the options goes through a sale during the first year of employment. The cliff may not apply in the event of a sale. Companies who are backed by buyout firms aren't stock to sharing equity with their employees. They usually have unfair vesting practices. Sometimes, certain clauses can be included in an option agreement that doesn't benefit the employee. For example, employees may be required to stay employed during the entire liquidation or sale of the company. If they left the company beforehand, they wouldn't receive their vested share. One of the most exciting aspects of joining a startup as an employee is getting stock options. Stock options are a method to achieve ownership of the company. Employees and an employer's incentives are closely aligned at this point. However, the main issue with regular vesting is that you could have too many people at the company, each owning a small percentage of the company. Therefore, the employee and employer feel stuck with each other, not truly happy if either wants to end the vesting relationship. This is what makes cliffs so attractive. Cliff vesting allows the employer a way to recruit employees who can bring value to their company. For example, if an employer wanted to make someone comfortable or gain his or her trust, the employer might offer a shorter cliff. Hiring managers see cliff vesting as a process that ensures company stock is only going to employees who are aligned with their financial goals. Once an employee becomes vested, the benefits the employee might receive depends on the details of the retirement plan vesting company offers. As an employee, when getting closer to your cliff date, your performance should definitely be key. You don't want to be let go from the firm options moments before being fully vested. This is something many employers keep a watch out for, especially startup companies. They do not want to lose their employees immediately after the cliff date, where they can take their shares and leave. If you need help with figuring out cliff vesting, you can post your question or concern on UpCounsel's marketplace. UpCounsel accepts only the cliff 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience. They have worked with or on behalf of companies such as Google, Stripe, and Twilio. Enterprise How It Works Locations Did you know? No need to spend hours finding a lawyer, post a job and get custom quotes from experienced lawyers instantly. View all legal areas. Everything You Need to Know Cliff vesting is the process where an employee is fully vested on a given date and receives their full benefits of the retirement plan on a specific date. The Different Types of Vesting The way vesting works depends on the included assets, such as stock or options. These represent accelerated benefits. Employees receive them as their time at the company grows. Employees receive a percentage of rights over contributions the stock makes to their retirement plan. This happens each year until they become vested. The percentage increases each year. Why Is Cliff Vesting Important? Reasons to Consider Not Using Cliff Vesting Options vesting creates uncertainty for an employee. Reasons to Consider Using Cliff Vesting One of the most exciting aspects of joining a startup as an employee is getting stock options. The Differences Between Defined Benefit and Defined Contribution Plans Once an employee becomes vested, the benefits the employee might receive depends on the details of the retirement plan the company offers. Defined Benefit Plan means the employer has to pay a certain amount to the employee vesting year. This amount is based on the employee's last year of salary, his or her years of service, and other factors. Defined Contribution Plan options the employer has to pay a certain amount into the plan. But it doesn't have a set amount the employer must pay out to the former employee. The former employee's payout depends on how the assets perform investment-wise. Deadline As an employee, when getting closer to your cliff date, your performance should definitely be key. Was this document helpful? The Best Lawyers For Less. Content Approved by UpCounsel. Find Top Startup Lawyers. Atlanta Startup Lawyers Austin Startup Lawyers Boston Startup Lawyers Chicago Startup Lawyers Dallas Startup Lawyers Houston Startup Lawyers Los Angeles Startup Lawyers New York City Startup Lawyers Philadelphia Startup Lawyers San Francisco Startup Lawyers Seattle Startup Lawyers View All Startup Lawyers. Vesting Reverse Vesting Section 83 b Election Restricted Stock Units Equity Split: Want To Grow Your Practice? Easily publish and share legal articles with thousands of readers looking for legal info on UpCounsel, for free! Want High Quality, Transparent, and Affordable Legal Services? 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