What does a "one-year cliff" in a vesting schedule signify?

What does a "one-year cliff" in a vesting schedule signify?

• A. Full equity granted at once
• B. No equity earned until the first year is completed
• C. Immediate vesting of small shares
• D. Annual review of equity distribution

Answer: (B)

A "one-year cliff" in a vesting schedule signifies that no equity is earned until the first year is completed. This means that an employee or founder will not receive any vested shares until they have been with the company for a full year. At that point, typically, a significant portion of their equity, often 25% for a four-year vesting schedule, will vest all at once. This structure is designed to ensure that individuals commit to the company for a minimum duration before any equity is granted. It serves as a protective measure for the company against early departures, ensuring that equity is earned based on sustained contributions rather than at the onset of employment. The "cliff" effectively aligns the interests of the parties involved by encouraging longer-term engagement and performance. Other options, such as "full equity granted at once," "immediate vesting of small shares," and "annual review of equity distribution," do not accurately reflect the nature of a cliff vesting schedule, as each of these options suggests different terms of equity distribution that do not relate to the concept of a one-year cliff.

A "one-year cliff" in a vesting schedule signifies that no equity is earned until the first year is completed. This means that an employee or founder will not receive any vested shares until they have been with the company for a full year. At that point, typically, a significant portion of their equity, often 25% for a four-year vesting schedule, will vest all at once.

This structure is designed to ensure that individuals commit to the company for a minimum duration before any equity is granted. It serves as a protective measure for the company against early departures, ensuring that equity is earned based on sustained contributions rather than at the onset of employment. The "cliff" effectively aligns the interests of the parties involved by encouraging longer-term engagement and performance.

Other options, such as "full equity granted at once," "immediate vesting of small shares," and "annual review of equity distribution," do not accurately reflect the nature of a cliff vesting schedule, as each of these options suggests different terms of equity distribution that do not relate to the concept of a one-year cliff.