Vesting cliff

On the cliff date, a block of the award vests at once. The rest vests in installments after it. A common startup schedule is four years with a one-year cliff. Under that schedule, a quarter vests at one year and the rest monthly over 36 months. If you leave before the cliff, nothing has vested.

Your grant agreement sets the cliff, and no tax rule requires one. Tax law asks only whether the award can still be forfeited. RSUs that vest at the cliff are taxed as wages when the shares are delivered, usually on the cliff date or soon after. Restricted stock, meaning actual shares you hold from the grant, is taxed on its value on the cliff date, minus what you paid. If you made an 83(b) election, you were taxed when you received the shares, so nothing is taxed at the cliff.

Stock options are not taxed when they vest. An NSO is taxed when you exercise it. If you exercise an NSO early, while the shares are unvested, you are taxed as they vest unless you file an 83(b) election. For ISOs without early exercise, the cliff sets the year a block first becomes exercisable. Each year, only $100,000 of stock, valued at grant, can first become exercisable as ISOs. Options above that are treated as NSOs.

The retirement plan cliff is a separate rule. For employer contributions to a 401(k), a cliff schedule must fully vest you after no more than 3 years of service. That rule does not apply to stock awards.