Vesting and cliffs — how equity is actually earned
"Four years with a one-year cliff" is the most quoted phrase in equity compensation — and one of the most misunderstood. Vesting is the machinery that turns a promise of equity into equity you'd actually keep if things changed tomorrow.
The basic schedule
Vesting spreads your entitlement over time. On a typical four-year monthly schedule, 1/48th of your award becomes vested each month. Leave halfway through, and — subject to the leaver provisions — the unvested half falls away.
A cliff is a waiting period at the start: nothing vests until the cliff date, then the accrued portion arrives all at once. A one-year cliff on a four-year schedule means month twelve delivers a quarter of the award in one step, with monthly vesting from there.
What vesting applies to — and what it doesn't
- Options: vesting usually controls when the option can be exercised. Unvested options simply lapse on leaving.
- Shares held from day one (common in PE sweet equity): you may legally own all the shares already, with vesting operating through the leaver provisions — the unvested portion is repurchased at cost if you go. Same economics, very different legal shape.
- Performance conditions: LTIPs and some PE structures add gates — EBITDA targets, return multiples — so time alone doesn't vest the award. A schedule that looks generous on time can be demanding on performance.
The clauses around the schedule
- Acceleration. Some documents vest everything (or a portion) on an exit — "single trigger" — or on being dismissed after a change of control — "double trigger". In UK PE documents, automatic acceleration is less common than people assume; where it exists it's usually negotiated.
- Vested ≠ untouchable. As our leaver guide covers, some drafting applies bad-leaver pricing to vested equity too. The schedule tells you what you've earned; the leaver definitions tell you what you'd keep.
- Pauses and extensions. Long leave, part-time changes, or (for EMI) falling below working-time requirements can interact with vesting and scheme status in ways worth checking rather than assuming.
Reading your own position
The questions that matter: What has vested as of today? What does the next twelve months add, and is there a cliff or performance gate in the way? And at a plausible exit date, what proportion of the award participates? Those three numbers — today, next year, at exit — turn a schedule buried in a PDF into something you can actually plan around.
FAQ
What happens to unvested equity when I leave?
For options, unvested portions typically lapse. For shares, the articles usually force a repurchase of the unvested portion at cost. The vested portion's fate depends on your leaver category — which is a separate set of definitions worth knowing cold.
Does vesting continue during notice periods or garden leave?
It depends on the drafting — some documents vest to the termination date, some to the end of notice, and some stop at the date notice is given. It's a detail with real money attached, and the answer is in your documents rather than in any general rule.
Is a longer cliff always worse for me?
Mostly, but not always — a cliff concentrates risk in the first year, and some packages trade a longer cliff for a larger award or better leaver terms. The package prices as a whole; the cliff is one lever in it.