Explaining Cliff Vesting: How it Works and Examples

January 19, 20247 min read
Explaining Cliff Vesting: How it Works and Examples
Share on facebookShare on TwitterShare on Linkedin

Key Takeaways

  • Cliff vesting is the process in which an employee becomes wholly vested on a certain date instead of in progressive totals over a lengthy period. 
  • Cliffs typically last between one and four years, depending on the company, and culminate with full employer vesting.
  • Vesting schedules can be based on time, milestones, or a combination of milestone and time based.

If retirement is on the horizon, and one’s employer offers retirement benefits, it is essential for planning purposes to understand cliff vesting. After all, the process means full benefits as opposed to a portion of benefits over time. Here is cliff vesting, how it works, and how to maximize funding for one’s Golden Years.

What is Cliff Vesting?

Cliff vesting is the process in which an employee becomes wholly vested on a certain date instead of in progressive totals over a lengthy period. 

Once they are eligible to receive benefits from their employer’s retirement or stock option plan, the employee is deemed “vested.”

Another way to explain cliff vesting is that, when companies offer equity to employees in their pay package, such employees must wait a period before they own it. Employees who leave their employer before becoming fully vested are ineligible for retirement benefits.

What are the Types of Cliff Vesting?

Vesting schedules can be based on time, milestones, or a combination of the two.

With time-based vesting schedules, employees are permitted to earn equity over a period. Note that, to exercise any options, most employees must remain at their employer for a year minimum.

Milestone investing is based on completion of a specific effort. Here, employees earn shares or options once a project is finished or the company meets a business goal, such as an IPO. 

Then there is mixed or hybrid investing, which is a combination of milestone and time-based investing. Before they can receive shares or options, the employee must remain with their employer for a certain period.

What are the Pros of Cliff Vesting?

Companies as well as employees benefit from employment longevity. In particular, the prospective employee may be lured by a short vesting cliff period. Otherwise, they may have to wait longer for full vestment in their company’s benefit plan.

Further, employees can generally be encouraged by cliff vesting to remain with the company and perform well. Companies are able to maintain a good working relationship with their employees while rewarding loyalty. 

What are the Cons of Cliff Vesting?

To some employees, cliff vesting can seem risky.  Many people have heard about a company terminating a contract right before completion of the initial vesting cliff qualifying period. The business could be taken over, for example, or there may be a buyout. Circumstances could also involve a new company failing prior to the vesting date. Also, the employee could leave before the date or even get fired.

Cliff investing can also possibly disincentivize long-term employees who may feel as though they should already be entitled to their entire share of their employer’s stock. Instead, they must wait longer. This could result in negative feelings among these employees.

How Do Vesting Schedules Work?

Companies have vesting schedules to prevent employees who do not remain with them from taking with them their employer retirement contributions. Another way to say it is, they offer vesting to incentivize people to stick with them.

Various plans have varying vesting schedules. A vesting schedule specifies when an employee finally owns there employer-sponsored stock options or retirement account contributions. 

Typical plans are for four years with a one-year “cliff.” Cliffs typically last between one and four years, depending on the company, and culminate with full vesting. Here, if stock options are in play, the employee would have 25 percent of their shares vested after a year.  For each subsequent month they remain with their employer, they get 1/48 of their shares invested. They are fully invested after four years.  

With a one-year cliff, once the employee reaches their one-year work anniversary, they will be completely vested in all employer contributions and any future contributions. The scenario is the same for two-, three-, or four-year cliff vesting plans.   

How Does Cliff Vesting Differ from Graded Vesting?

The difference between cliff and graded vesting is that the former occurs all at once on a certain date, such as after four years of employment. By contrast, graded vesting happens over time in increments. If it’s a 10-year vesting period, for example, the employee after two years is 20 percent vested, 30 percent after three years, and 100 percent following 10 years.

Why is Cliff Vesting Volatile?

Generally, cliff vesting can help shield investors against market volatility. However, employees may miss out on prospective gains if their employer’s stock price falls markedly during the vesting period. Why? Because their shares cannot be sold until the vesting period ends, even if the stock prices keep dropping.

What Happens When You Become Fully Vested?

After an employee is vested, their employer may place the funds in a retirement plan that is either a defined benefit plan or a defined contributions plan.

  • Defined benefit plan. This is where the company provides all the plan funds. A pension is an example.  Each year, the employee gets a certain amount of benefit.  How much the employee gets depends on how much they were making in their final year and how long they were with the company. There may be other factors involved and which must be delineated in the original pact.
  • Defined contributions plan. With such a plan, the contributes an established amount of their salary to it during their service. Oftentimes, the employer will match those funds. A 401(k) is a plan example. How much the employee gets will vary depending upon the investments chosen, usually through at least one mutual fund.

How to Maximize Your Retirement?

There are ways to get the most out of one’s retirement outside of through employer plans. One can begin a rollover individual retirement account, for example. Adding alternatives – assets other than stocks and bonds – to one’s retirement portfolio has historically been a complicated process with high fees involved.

That is no longer necessarily true, at least not if one goes through Yieldstreet. As one of the leading alternative investment platforms, Yieldstreet permits investors to seamlessly diversify their positions with private-market alternatives such as art and real estate. Yieldstreet’s IRA traverses such asset classes and more and offers a retirement calculator to help with planning. 

The primary aim is to create retirement portfolios that are less reliant upon a constantly fluctuating stock market. With the addition of private-market investments to their tax-favored account, once can potentially maximize returns.  

Diversification, which does not end with taxable accounts, is a major benefit of private-market investments. In fact, building a portfolio of varying asset classes and anticipated performances can help mitigate risk as well as guard against inflation and potentially improve returns.

Yieldstreet IRA

Strengthen your future with a private market IRA.

Alternative Investments and Portfolio Diversification

Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. 

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.

However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other alternative investments. 

Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10,000.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.


Understanding the vesting process, as it applies to both retirement and pension plans, is key to retirement planning. After all, there are pros and cons for participation, with timing playing a crucial role. Before signing on, employees should ensure they are comfortable with their vesting schedule terms.

Remember, too, that beyond employer plans, there are other ways to maximize retirement that can also diversify one’s investment portfolio.

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to www.yieldstreetalternativeincomefund.com. The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

300 Park Avenue 15th Floor, New York, NY 10022


No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice, except for specific investment advice that may be provided by YieldStreet Management, LLC pursuant to a written advisory agreement between such entity and the recipient. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefore.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and are willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

YieldStreet Inc. is the direct owner of Yieldstreet Management, LLC, which is an SEC-registered investment adviser that manages the Yieldstreet funds and provides investment advice to the Yieldstreet funds, and in certain cases, to retail investors. RealCadre LLC is also indirectly owned by Yieldstreet Inc. RealCadre LLC is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Information on all FINRA registered broker-dealers can be found on FINRA’s BrokerCheck. Despite its affiliation with Yieldstreet Management, LLC, RealCadre LLC has no role in the investment advisory services received by YieldStreet clients or the management or distribution of the Yieldstreet funds or other securities offered on our through Yieldstreet and its personnel. RealCadre LLC does not solicit, sell, recommend, or place interests in the Yieldstreet funds.

Yieldstreet is not a bank. Certain services are offered through Synapse Financial Technologies, Inc. and its affiliates (collectively, “Synapse”) as well as certain third-party financial services partners. Synapse is not a bank and is not affiliated with Yieldstreet. Bank accounts are established by Evolve Bank & Trust. Brokerage accounts and cash management programs are provided through Synapse Brokerage LLC (“Synapse Brokerage”), an SEC-registered broker-dealer and member of FINRA and SIPC. Additional information about Synapse Brokerage can be found on FINRA’s BrokerCheck. By participating in a Synapse cash management program, you acknowledge receipt of and accept Synapse’s Terms of Service, Privacy Policy, and the applicable disclosures and agreements available in Synapse’s Disclosure Library.

Investment advisory services are only provided to clients of YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission, pursuant to a written advisory agreement.

Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.

Read full disclosure