Four-Year Vesting with One-Year Cliff

Earning founder and employee equity over time, so ownership tracks contribution actually made rather than a stake handed over on the first day.

A company grants its first engineering hire 1% of the company. Eleven months later, the engineer leaves. Without vesting, that 1% leaves too, diluting every founder and future investor for less than a year of work. With the standard four-year schedule and one-year cliff, the engineer keeps nothing because the first tranche has not vested. Vesting answers one question: when does equity become the holder’s to keep?

Context

This pattern sits at the founding-formation stage and runs forward through every grant the company ever makes. It applies first to the founders’ restricted common shares and then to every option grant the company gives employees and advisors. By the time an investor is reading the cap table, founder vesting is a recorded fact, and its presence or absence is one of the first things a sophisticated reader checks.

Vesting is a schedule layered on top of an equity grant. The grant sets the maximum a person can earn; the schedule decides how much is theirs at any moment. A grant without a schedule is a gift. A grant with one is a commitment to stay.

The founder structures vesting into their own shares and every offer they extend. The employee or candidate reads it as the term that decides what an equity package is worth if they leave. The investor reads it as a signal that the company can survive a departure.

Problem

Equity granted up front and never earned creates a problem that usually stays hidden until someone leaves. A co-founder who walks away in year one while keeping half the company is the canonical case, but the same dynamic governs every grant: an early employee who leaves after a few months, an advisor who stops returning calls, or a founder whose interest fades. In each case, a large slice of ownership has been handed to someone whose contribution turned out to be brief. That slice now sits on the cap table forever, diluting the people still doing the work and complicating every future round.

The deeper problem is that contribution is unknowable at the moment equity is granted. Nobody can tell on day one which founder will carry the company and which will burn out, which hire will become indispensable and which will be gone by spring. A grant has to be made anyway, because that’s how people are recruited. So the company needs a mechanism that lets it commit equity to someone whose future contribution it cannot yet judge, while keeping the equity recoverable if that contribution never materializes.

Forces

• Commitment versus recoverability. A grant has to be large enough and certain enough to recruit someone who is taking real risk. But the company also has to be able to recover that equity if the person leaves early. Vesting is the structure that holds both: the grant is real and named, but it is earned rather than given.
• Retention versus golden handcuffs. A schedule that ties equity to staying is exactly what keeps good people through the hard years. The same mechanism can trap someone who wants to leave but cannot afford to forfeit unvested shares, and an unhappy person held only by a schedule is rarely worth keeping.
• Standardization versus fit. The 48-month / 12-month-cliff form is so widely expected that deviating from it invites suspicion at diligence and confusion in candidates. But not every situation fits the default: a serial founder bringing prior work, a late-arriving co-founder, an acquisition that should accelerate.
• The departing-employee window. Vested options are not free. They must be exercised, usually within a short window after departure, and exercising costs money and can trigger tax. A schedule that vests generously but forces exercise in 90 days can leave a departing employee unable to capture what they earned.

Solution

Put every founder and employee grant on a four-year schedule with a one-year cliff, and treat any deviation as a deliberate exception that has to justify itself. The standard form has four moving parts, and each one does specific work.

The four-year term is the total period over which the full grant is earned. It reflects a rough consensus that four years is how long it takes to know whether an early bet paid off, and it sets the expectation that a meaningful contributor stays roughly that long.

The one-year cliff is the part that does the most work. Nothing vests in the first twelve months; at the one-year anniversary, a quarter of the grant vests at once, and the rest then vests in monthly or quarterly increments over the remaining three years. The cliff filters early mistakes. Someone who leaves or is let go inside the first year, when a hire is most likely to turn out wrong, keeps no equity at all. The company is protected from a bad early grant without pretending it can predict who the bad grant will be.

The vesting commencement date anchors the schedule, and it can differ from the formal grant date. A serial founder or a co-founder who has already been working unpaid for months may negotiate back-vesting, credit for time already served, by setting the commencement date in the past. They are not made to re-earn equity for work already done. This is the most common and most defensible deviation from the default.

The acceleration terms govern what happens to unvested equity in an acquisition. The standard protection is double-trigger acceleration: unvested shares accelerate only if the company is acquired and the holder is terminated without cause within some window after the deal. Single-trigger acceleration, vesting on the acquisition alone, is rarer because acquirers dislike paying for retention after the retention incentive has disappeared.

How It Plays Out

The protective case is the one the cliff was built for. Two founders incorporate and put their own shares on four-year vesting with a one-year cliff. Eight months in, one of them realizes the company isn’t what they signed up for and leaves. Because they never reached the cliff, they forfeit their entire stake, and the company is whole. The remaining founder is not carrying a partner who owns half the company and contributes nothing, and the next investor reads a clean table rather than a cautionary tale.

Had the founders skipped vesting “because we trust each other,” that same departure would have left a 50% owner with no role. That is one of the cleanest ways an otherwise fundable company becomes unfundable. Brad Feld and Jason Mendelson, who wrote the standard practitioner reference on venture terms, describe missing or non-standard founder vesting as one of the items that reliably complicates a financing.

The deviation case shows the schedule bending where it should. A repeat founder spends a year building a product alone before recruiting a co-founder and incorporating. If the founder starts a fresh four-year clock at incorporation, they are re-earning a year of work already done. The fix is back-vesting: the vesting commencement date is set a year in the past, so roughly a quarter of their grant is vested on day one and the rest continues on schedule. The default schedule is preserved. Only the commencement date moves, and it moves for a documented reason an investor can read and accept.

The acquisition case shows acceleration at work. A company with a strong team is acquired, and the acquirer is buying the team as much as the product. Double-trigger acceleration means employees’ unvested equity does not accelerate on the deal alone. It accelerates only if the acquirer then terminates them without cause. The structure aligns everyone: employees keep their retention incentive, the acquirer gets the team it paid for, and anyone let go in a post-acquisition reshuffle is protected from forfeiting equity they were on track to earn.

Consequences

Benefits. Vesting lets a company grant meaningful equity to people whose contribution it cannot yet judge, because the equity is recoverable if the contribution does not come. It protects the founders from each other, the company from a bad early hire, and every future investor from inheriting dead equity on the table. It keeps good people through the years when leaving is tempting and the payoff is still distant. Because the 48/12 form is universally expected, having it in place is invisible: it generates no friction at diligence precisely because its absence is what gets flagged. The discipline costs almost nothing to install at formation and is expensive to retrofit later, which is the argument for doing it on day one.

Liabilities. A schedule that ties equity to staying can hold someone who wants to leave, and equity is a poor substitute for a reason to stay; a person retained only by unvested shares often isn’t worth retaining. The 90-day post-termination exercise window can make vested options unreachable for an employee who cannot afford to exercise, turning earned equity into forfeited equity. The holder bears that cost, not the company, and careful candidates now scrutinize it. Standardization cuts the other way too: a situation that warrants a different schedule, such as a part-time co-founder, a late arrival, or prior work to credit, still has to be papered carefully because anything non-standard draws attention at the table. The schedule is recorded on the cap table and read at diligence, so a deviation that is not documented and defensible becomes a question the founder has to answer at the worst possible time.

Related Articles

Sources

• Brad Feld and Jason Mendelson, Venture Deals — the standard practitioner reference on venture terms, and the source for how investors read founder and employee vesting at diligence and why missing or non-standard vesting complicates a round.
• Y Combinator’s founder and employee equity guidance, including its library on vesting and stock — the canonical statement of the four-year / one-year-cliff norm, the case for founder vesting from day one, and the standard structure of early-employee option grants.
• Noam Wasserman, The Founder’s Dilemmas — the Harvard Business School study of thousands of founders, which documents how unprotected early equity decisions become the disputes that sink companies, the failure vesting is designed to contain.
• Carta’s equity and vesting guidance — the benchmark source on prevailing vesting-schedule conventions, the mechanics of the cliff and monthly vesting, and the rise of extended post-termination exercise windows.