What is the vesting clause? 

Anyone who has a shareholding in a company should be vested. Vesting means that the shareholder becomes entitled to the shares, including the rights in those shares.
Where the Vesting Agreement comes in is that instead of getting your full shareholding upfront, you get it regularly in portions over a set period. The Vesting Agreement regulates various aspects of that vesting, such as how long that period will be, how many shares will vest in each month or year during that period, and any performance targets that you might be expected to achieve for the company (if you are an employee, for example).

What is Cliff Period?

Vesting can result in lots of people owning little pieces of the company, which makes future legal work difficult. Cliffs let you try out a partner in the form of a co-shareholder or incentivize a new employee with shareholding without parting with any shareholding upfront. If the vested person leaves during the cliff or perhaps fails to achieve certain performance targets that may be part of the deal, then they get no shareholding. The vested person gets everything that they would have accrued during the cliff period when the cliff ends. 

Sample Vesting clause in a Co-founder agreement 

Upon the formation of the Company, the entire issued share ownership of the Company shall reflect the following:

Should the Founders wish to reserve any portion of the shares for future employees or for an option share pool, any such portion of shares reserved will dilute all Founders equally.

[FOUNDER1 NAME] interest in the Company shall vest pursuant to a four (4) year vesting schedule beginning [FOUNDER1 VESTING STARTING DATE], which shall vest 1/48th per month in exchange for consecutive service to the Business Concept and Technology.  Additionally, [FOUNDER1 NAME] vesting schedule shall be subject to a one (1) year cliff. Founders shall all reasonably agree to the definition of “consecutive service” for purposes of this vesting schedule.

[FOUNDER2 NAME] interest in the Company shall vest pursuant to a four (4) year vesting schedule beginning [FOUNDER2 VESTING STARTING DATE], which shall vest 1/48th per month in exchange for consecutive service to the Business Concept and Technology.  Additionally, [FOUNDER2 NAME] vesting schedule shall be subject to a one (1) year cliff. Founders shall all reasonably agree to the definition of “consecutive service” for purposes of this vesting schedule.

If a Founder who is subject to a vesting schedule departs the Company prior to full vesting of his or her shares, the remaining portion of any unvested shares shall be returned to the Company in accordance with that vesting schedule. 

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