What is a cliff?

In the context of stock options, a cliff period is the amount of time that must pass before an employee can start to exercise their options. During this period, your employee does not have the right to exercise any portion of their stock options.

Most cliff periods tend to last around one year.

What is the purpose of a cliff period?

The cliff period helps you distribute equity in a fair and controlled manner. It ensures that employees who have proven their commitment and value to the company over time receive the benefits of stock ownership, while limiting the number of stock options to employees who may not remain with the organisation.

Managing cliff periods

To effectively manage the cliff period in your company's stock option plan, make sure you communicate it clearly. Clarify the duration of the cliff, and provide guidance on what it means and how it works. Transparency is crucial for managing expectations and ensuring employees understand the conditions under which they can exercise their stock options.

Key takeaways

• Clearly communicate the duration of the cliff period.
• Set the duration based on industry standards. Most cliff periods are around one year.