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4 Years Vesting and 1 Year Cliff - Founders Equity Split 101 | Starting a Startup - Entrepreneurship PDF Download
WHAT IS FOUR YEARS WITH A ONE YEAR CLIFF?
Four Years with a One Year Cliff is the typical vesting schedule for startup founders’ stock.
Under this vesting schedule, founders will vest their shares over a total period of four years. The one year cliff means that the founders will not get vested with regards to any shares until the first anniversary of the founders stock issuance.
Upon the one-year anniversary, the founders will each vest 25% of their total shares. Vesting will usually occur monthly after the cliff expires.
Here’s what a “4 Years with a One Year Cliff” vesting schedule looks like in a legal document:
“…25% of the total number of Founder1’s Shares shall be released from the Repurchase Option on the one-year anniversary of this Agreement, and an additional 1/48th of the total number of Shares shall be released from the Repurchase Option on the corresponding day of each month thereafter, until all of Founder1’s Shares have been released on the fourth anniversary of this Agreement.”
The “Repurchase Option” is simply the company’s option to repurchase Founder1’s unvested shares upon Founder1’s departure from the startup company. Also, you should note that vesting schedules trigger other complex issues such as tax, so please don’t simply copy the above text and paste it into a stock purchase agreement.
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FAQs on 4 Years Vesting and 1 Year Cliff - Founders Equity Split 101 - Starting a Startup - Entrepreneurship
| 1. What does it mean to have a 4-year vesting and 1-year cliff for founders' equity split? |  |
Ans. Having a 4-year vesting and 1-year cliff for founders' equity split means that the ownership shares or equity granted to the founders of a company will be distributed over a period of 4 years, with a one-year period known as the cliff. During the cliff period, no equity is vested, and if a founder leaves the company before the cliff is over, they will not receive any equity.
| 2. How does the 4-year vesting and 1-year cliff work in terms of founders' equity split? | |
Ans. The 4-year vesting and 1-year cliff work by gradually distributing the founders' equity over a 4-year period. After the 1-year cliff, equity starts to vest on a monthly or quarterly basis, typically. For example, if a founder has been granted a 20% equity stake, they will not receive any equity until the cliff is over. After the cliff, they will receive 1/48th (1/4th of 20%) of their equity every month or quarter until the end of the 4-year period.
| 3. Why is the 1-year cliff important in founders' equity split? | |
Ans. The 1-year cliff is important in founders' equity split because it acts as a protection mechanism for the company. It ensures that founders are committed to the company and its long-term success. If a founder leaves before the cliff is over, they will not receive any equity, which incentivizes them to stay with the company for at least one year before receiving any ownership stake.
| 4. Can the vesting period and cliff duration be customized for founders' equity split? | |
Ans. Yes, the vesting period and cliff duration can be customized for founders' equity split based on the specific needs and agreements of the founders and the company. While the 4-year vesting and 1-year cliff are common structures, they are not set in stone. It is important for founders to negotiate and agree upon these terms to align with their goals and circumstances.
| 5. What happens to the vested equity if a founder leaves the company before the 4-year vesting period is over? | |
Ans. If a founder leaves the company before the 4-year vesting period is over, they will typically only retain the equity that has already vested. The unvested equity that would have been distributed in the future is usually forfeited. This ensures that founders who contribute to the company's growth and success over time receive their fair share of ownership, while those who leave early do not retain a significant ownership stake.
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