transcripts/37-Corporate-Law-101.txt

Since you will most likely be forming a private limited company for your startup, it helps
to have some knowledge about law so you can understand the basics of our company works.
A company is created by a human being who we can call the founder of the company.
This company called XYZ Private Limited comes into existence through a process of law.
You fill a few forms and create a few documents that define the nature of this company.
And based upon those documents, the government provides you with the certificate of incorporation,
which is like the birth certificate of a company.
Now since a company only exists as a legal concept and not as a human being, the founder
has a separate existence from the company.
Even though in practical terms, the founders may believe that they really are the company.
Legally that is not so.
A company is owned by people called shareholders, not the founders.
So if you as a founder do not own all the shares of your company, you are not the complete
owner of your company.
Even though you started it, nurtured it and put your blood sweat and tears into it.
Remember this.
And that is why be very, very careful who you give out your shares to.
So shareholders and not founders own the company.
Since the company is merely a legal name and it does not have a physical existence, it
relies on human beings to carry out its operations.
So the owners, meaning the shareholders, appoint a few people called the directors of the company,
who are responsible to manage the day to day affairs of the company.
The shareholders meet periodically to review the operations of the company and to see how
the directors are fared.
If they do not like what they see, they can replace the directors.
The shareholders meeting of a large listed company could be pictured as taking place in
a huge room with many individual shareholders in the room and the board meeting could be
in a small room with a long table.
It is also very likely that for a listed company, the board members are not the same as the
shareholders in their large room.
In a startup that is a private limited company, however, the picture might be slightly different.
Both the meetings might take place in a small room and it is quite possible that the same
people are present at both the meetings.
That is because in a private limited company, you may have very few shareholders, say the
founders and perhaps the investors.
And some of those shareholders might also be the directors of the company, but legally,
they perform two separate rules.
They just happen to be in both the rules at the same time.
When you need to grant stock options, you need the approval of the shareholders.
They approve a broad set of parameters within which the stock options scheme can be created.
The board with the help of the management team then creates a specific stock options
scheme within those parameters approved by the shareholders.
This specific scheme needs to be approved only by the board now and not the shareholders,
since this scheme is drawn within the parameters already approved by the shareholders.
While the people in the room may look the same, they first act as shareholders to approve
the broad parameters and then as directors of the board to approve a specific stock options
scheme for the employees.
When the management decides how many options to grant to whom under that scheme, the board
of directors also need to approve the grant of those options to those specific employees.
The grant becomes legally valid only after the board of directors approves it.
In all these cases, the shareholders as well as the board convey their approval by passing
a resolution that is presented to them.
These resolutions are the official record that show that the shareholders of the board
have provided their approval.
So make sure you have these legal documents approved in the proper fashion at a properly
convened shareholders meeting or a board meeting.
You should take the advice of a qualified legal professional to handle these procedural
matters since there might be quite a few legal processes you need to follow for these approvals.
While you will find the basic legal documents for stock options here in ATEM, you will need
to complete certain other legal compliances with respect to your meetings etc. that are
very important.
So please take the appropriate legal guidance.
So to recap, the shareholders first approve the broad stock option terms by passing a
resolution.
Then the board creates a specific stock option scheme by passing a resolution.
Then the board grants a certain number of stock options to certain specific people at
certain terms by passing another resolution.
Once the board has approved this grant of options, you then give out the grant letter,
the option certificate and the stock options agreement to the employees.
The employees sign the agreement and return a copy to you for your record.
The stock option agreement is the legal contract between the company and the employee.
So please ensure the agreement is drawn up and signed properly.
If you need to increase the number of options approved by the shareholders, you need to
hold another shareholders meeting and pass another resolution.
So remember the key decisions about the company are taken by holding these shareholders and
board meetings.
And these are important legal events.
So hold them and record them in a proper manner.
According to law, do not take this lightly.
A verbal approval obtained from only one of the directors casually over a telephone call
or a cup of coffee may not be sufficient or legally valid if you do not have proper legal
documents to back it up.
Do it the right way with proper documentation.
Your legal counsel will help you with this.