Clause of a period of minimum permanence («Cliff Period»)
What is the clause of a minimum permanence period («Cliff Period»)?
The clause of a period of minimum permanence, also known as «Cliff Period», is an agreement that is usually established between the founders of a Startup and the investors who contribute capital in exchange for a participation in the company.
The «Cliff Period» represents a period of time during which a shareholder or partner cannot liquidate his part in the company.
The purpose of this clause is to protect investors from the founders leaving the company after receiving the capital, leaving the project without their talent and commitment. It is also a way to incentivize the founders to work with motivation and in the long term to grow the company and increase its value.
If the founders leave the company before that time, they lose their rights to the shares and investors can buy them back at a nominal price.
This clause is usually linked to the vesting clause. The clause of a minimum permanence period is applied at the beginning of the vesting, as a precondition to start consolidating the rights over the shares.
- The percentage of shares or shares that is assigned to each founder and the percentage that is reserved for investors.
- The minimum time period of Cliff.
- The conditions or causes that can provoke the total or partial loss of the rights acquired by the founders (leave).
- The options or purchase or sale rights that the company or investors have over the shares of the founders, as well as the price and conditions of said operations
In which contracts is it usually applied?
- «Phantom Shares» contract.
- Annexation contract of co-founder or employee with equity
- Shareholders agreement