Cliff

What it means

When a company gives you stock, they often don't give it to you all at once. Instead, you earn it over time through a process called vesting. Vesting is the period you must work for a company before you truly own the stock.

A cliff is a rule that says you must work for a specific amount of time, usually one year, before any of your stock is yours. If you quit or are fired before that first year ends, you receive zero shares. You must reach the cliff date to earn your first portion of stock.

A simple example

Imagine Sarah starts a new job. Her company promises her 1,000 shares over four years with a one-year cliff. Sarah works hard for 11 months, but then leaves for a new job. Because she left before her one-year cliff, she receives zero shares. However, if Sarah stays for exactly 12 months, she passes the cliff. She immediately earns 250 shares, which is 25% of her total. For the next three years, she earns the remaining shares bit by bit.

Why it matters to you

• Your stock is not real money until you pass the cliff.
• Planning to leave a job before your cliff date means you are walking away from your equity.
• Once you pass the cliff, you own that portion of stock even if you leave the company later.

Common mistakes to avoid

• Don't assume you own your equity the day you get your job offer; you must stay through the cliff.
• Don't make big financial plans based on stock value until you have officially passed your cliff date.

Words used on this page

• Equity: Ownership in the company, often given as stock shares.
• Vesting: The process of waiting for your company stock to become fully yours.
• Shares: Units of ownership in a company.