What does “4 years vesting with 1 year cliff” mean?

Like some of the other answers point out, the cliff just means that the vesting schedule will not be enforceable until one year from whenever it was initially granted. This is different from a typical vesting schedule which will start right away when granted. A 1 year cliff also means that the employee will not be entitled to any benefits under the plan until a year later when the cliff runs out. So, the employee carries a risk of missing out on these benefits if he or she is fired or leaves the company before the 1 year cliff period runs out.

After the 1 year cliff runs up, then the 4 year vesting schedule will start and the employee will likely be entitled to ¼ of the benefits each year for 4 years. This is generally how it will go, but it is important to remember that a vesting schedule is basically only a contract so the specific terms (such as amount per payment and how frequently those payments are made) can realistically be drawn up however the company chooses.

Like I mentioned above, the employee will be undertaking a risk of nonpayment under the plan for 364 days until the cliff period runs out because the company will not be bound by the agreement until one year runs. For that risk, the employee may require the company to offer more payment on the back end to compensate for such risk.

On the other hand, a startup will typically be using a cliff to protect itself from giving up too much equity before it can achieve any growth. Many startups fail in the early stages due to too many obligations, so this gives a startup a chance to defer some of those liabilities to a time down the road when they hope to be making profits. In short, the cliff period will give the company some time to grow before any vesting payments will be due to its employees.

It is important for both the employer and employee to understand the vesting schedules that they agree to. For that reason, it would be a good idea to speak with an attorney who can help you to fully understand the agreement that you are getting into.

I hope I answered you question, but if you have more or if you are looking for an attorney to help you understand your agreements, you should check out LawTradeswhere we will match you with an experienced attorney who can answer your questions. The initial consultation is free and our attorneys have experience working w/ these types of agreements.