Vesting schedules and the cliff

Vesting means earning your right to something over time. If you are granted 4,800 options with a four-year vesting schedule, you do not get all of them on day one. You earn them in parts as you keep working. Until an option vests, you cannot exercise it. Once it vests, the right is yours, subject to the exercise window in your plan.

Companies use vesting to link the reward to staying. A person who leaves in month three has not yet helped the company grow, so most plans give such a person nothing. Vesting also protects the company's other owners, who do not want to lose a slice of the business to someone who left early.

A cliff is an early waiting period before any vesting happens. With a one-year cliff, if you leave before completing twelve months, none of your options vest. On the day you complete twelve months, a block vests all at once, usually one quarter of a four-year grant. After the cliff, vesting continues in small steps, monthly or quarterly.

The cliff protects the company from short stays. For the employee it creates one sharp risk: leaving in month eleven means zero, while staying one more month means a quarter of the grant. Many employees time their moves with this in mind, and good managers know it and treat it fairly.

The most common pattern is four years with a one-year cliff. Not every company uses it. Some choose three years, some five, and some have back-loaded schedules where later years vest more. Indian company law requires at least one year between the grant and the first vesting, so a cliff of at least one year is effectively the floor for most private companies.

Here is how a standard four-year schedule with monthly steps after the cliff behaves:

• Months 0 to 11: nothing has vested.
• Month 12: 25 percent vests in one go.
• Months 13 to 48: the remaining 75 percent vests in equal monthly parts, so about 2.08 percent each month.
• Month 48: 100 percent has vested.

Acceleration means some unvested options vest early on a specific event. There are two kinds. Single-trigger acceleration vests options when the company is acquired. Double-trigger acceleration needs two things: the company is acquired, and the employee is let go or has their role cut afterwards.

Double-trigger is more common because buyers prefer to keep employees motivated after an acquisition. Acceleration is not automatic. It exists only if your plan or letter says so, so read the clause on a change of control.

Unvested options usually lapse the day you leave. Vested options stay, but you must exercise them within the window in your plan, often 30 to 90 days after your last day. This matters because exercising costs money and may trigger tax, as covered in the guide on ESOP taxation.

Some newer plans give a longer window, such as several years, so that people who leave are not forced to find cash quickly. Others take back vested options if the person is dismissed for misconduct. These are plan terms and they vary, so ask for the full plan document, not just the offer letter.

Not every company follows the four-year pattern. A very early startup may use a shorter schedule to attract a senior person who has other offers. A company that wants to reward long service may back-load the grant, so that the last year vests more than the first. Others grant fresh options every year, so that each year of work adds a new four-year layer on top of the old ones.

Performance-linked vesting is rarer in India but exists. Part of the grant vests only if a target is met, such as a revenue goal. These terms can be fair, but they should be written clearly, with numbers and dates, so that nobody argues later about whether the target was hit. If your grant has a condition of this kind, ask who measures it and how.

People mix these up. Vesting is about earning the right. Exercising is about using it by paying the strike price and receiving shares. You can vest and never exercise. A vested option has no tax effect until you exercise it.

Leaves of absence and sabbaticals may pause vesting in some plans. Check the policy if you plan a long break.

Count your vesting dates the way you count a notice period. Know the month the cliff ends, the date of the next step and the length of your exercise window after leaving. If you plan to switch jobs, a few weeks can change the outcome, so do the arithmetic before you resign.

Founders have their own vesting too, covered in the guide on founder vesting. This guide is general information, not legal advice, so ask a lawyer to review a complex plan.