What is a Cliff?
During the cliff period, options on virtual shares cannot be exercised.
A cliff is a fixed period at the beginning of a vesting schedule during which the beneficiary does not receive any options on virtual shares. Before the cliff ends, no virtual shares can be created.
Once the cliff ends, the employee receives all accumulated options on virtual shares at once.
Calculation example: Assume an employee receives 40 options on virtual shares that vest over 4 years. The virtual shares are distributed evenly over the vesting period:
- 40 virtual shares ÷ 4 years = 10 options on virtual shares per year
The employee thus receives 10 additional options on virtual shares each year.
Cliff (typically: 1 year) Often an additional cliff is agreed upon. During the cliff period, the beneficiary does not yet receive any exercisable options on virtual shares.
Once the cliff ends, the employee receives all accumulated options on virtual shares at once.
Example with a 1-year cliff:
- Year 1 (cliff): no options on virtual shares yet
- After 1 year: the employee receives 10 options on virtual shares at once
- After that, the remaining virtual shares continue to vest until all 40 options on virtual shares have been transferred after 4 years.
The beneficiary decides when to exercise the options, thereby triggering the taxable event.