Corporate & Securities Law

What is Four Years With a One Year Cliff?

By Ryan Roberts

Four Years with a One Year Cliff is the typical vesting schedule for startup founders’ stock.

Under this vesting schedule, founders will vest their shares over a total period of four years. The one year cliff means that the founders will not get vested with regards to any shares until the first anniversary of the founders stock issuance.

Upon the one-year anniversary, the founders will each vest 25% of their total shares. Vesting will usually occur monthly after the cliff expires.

Here’s what a “4 Years with a One Year Cliff” vesting schedule looks like in a legal document:

“…25% of the total number of Founder1’s Shares shall be released from the Repurchase Option on the one-year anniversary of this Agreement, and an additional 1/48th of the total number of Shares shall be released from the Repurchase Option on the corresponding day of each month thereafter, until all of Founder’s Shares have been released on the fourth anniversary of this Agreement.”

The “Repurchase Option” is simply the company’s option to repurchase Founder1’s shares upon Founder1’s departure from the startup company. Also, you should note that vesting schedules trigger other complex issues such as tax, so please don’t simply copy the above text and paste it into a stock purchase agreement.

Full post as published by The Startup Lawyer on January 06, 2010 (boomark / email).