Strategic Cliff Designs in German ESOPs Post-BAG Ruling
A March 2025 German Federal Labour Court ruling has fundamentally transformed equity vesting strategies, making 'cliff' delays a key retention tool instead of forfeiture mechanisms.
Newsnibs Staff
- 2026-10-02
- Updated 4:04 PM UTC
A commentary published October 1 argues that the "cliff" in German start-up equity plans has become a key retention tool. The article, which covers Employee Stock Ownership Plans (ESOPs) and Virtual Stock Ownership Plans (VSOPs), says cliffs were once treated as boilerplate. Its author ties the change to a March 2025 ruling by the German Federal Labour Court (Bundesarbeitsgericht, or BAG), which eliminated the ability to forfeit vested awards when an employee leaves voluntarily.
In the standard structure, 25% of a grant vests on the first anniversary of a four-year vesting schedule. That twelve-month version is by far the most common. The Carta PE Executive Equity Report 2026 found that 96% to 98% of cliffs, in both PE-backed and VC-backed companies, are set at twelve months.
Some companies go longer. Extended cliffs of 18 to 24 months are in use, and Westwing applied a 36-month cliff to its senior management. OpenAI took the opposite course in late 2025, adopting a "no cliff" approach to compete in the market for AI talent.
The report also shows a gap between the two kinds of investor-backed firms in how often grants carry a cliff at all. Among PE-backed companies, 87.1% of employee grants and 70.2% of management grants include one. Among VC-backed companies, 54.6% of executive grants do.
The author recommends using cliffs to delay vesting rather than to forfeit it. The author also warns that cliff periods longer than 24 months operate in legal grey areas under German AGB law, the law on standard terms and conditions.
Photo by Nicholas Cappello on Unsplash