transcripts/37-Corporate-Law-101.vtt

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Since you will most likely be forming a private limited company for your startup, it helps

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to have some knowledge about law so you can understand the basics of our company works.

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A company is created by a human being who we can call the founder of the company.

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This company called XYZ Private Limited comes into existence through a process of law.

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You fill a few forms and create a few documents that define the nature of this company.

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And based upon those documents, the government provides you with the certificate of incorporation,

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which is like the birth certificate of a company.

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Now since a company only exists as a legal concept and not as a human being, the founder

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has a separate existence from the company.

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Even though in practical terms, the founders may believe that they really are the company.

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Legally that is not so.

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A company is owned by people called shareholders, not the founders.

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So if you as a founder do not own all the shares of your company, you are not the complete

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owner of your company.

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Even though you started it, nurtured it and put your blood sweat and tears into it.

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Remember this.

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And that is why be very, very careful who you give out your shares to.

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So shareholders and not founders own the company.

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Since the company is merely a legal name and it does not have a physical existence, it

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relies on human beings to carry out its operations.

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So the owners, meaning the shareholders, appoint a few people called the directors of the company,

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who are responsible to manage the day to day affairs of the company.

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The shareholders meet periodically to review the operations of the company and to see how

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the directors are fared.

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If they do not like what they see, they can replace the directors.

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The shareholders meeting of a large listed company could be pictured as taking place in

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a huge room with many individual shareholders in the room and the board meeting could be

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in a small room with a long table.

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It is also very likely that for a listed company, the board members are not the same as the

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shareholders in their large room.

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In a startup that is a private limited company, however, the picture might be slightly different.

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Both the meetings might take place in a small room and it is quite possible that the same

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people are present at both the meetings.

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That is because in a private limited company, you may have very few shareholders, say the

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founders and perhaps the investors.

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And some of those shareholders might also be the directors of the company, but legally,

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they perform two separate rules.

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They just happen to be in both the rules at the same time.

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When you need to grant stock options, you need the approval of the shareholders.

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They approve a broad set of parameters within which the stock options scheme can be created.

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The board with the help of the management team then creates a specific stock options

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scheme within those parameters approved by the shareholders.

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This specific scheme needs to be approved only by the board now and not the shareholders,

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since this scheme is drawn within the parameters already approved by the shareholders.

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While the people in the room may look the same, they first act as shareholders to approve

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the broad parameters and then as directors of the board to approve a specific stock options

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scheme for the employees.

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When the management decides how many options to grant to whom under that scheme, the board

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of directors also need to approve the grant of those options to those specific employees.

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The grant becomes legally valid only after the board of directors approves it.

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In all these cases, the shareholders as well as the board convey their approval by passing

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a resolution that is presented to them.

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These resolutions are the official record that show that the shareholders of the board

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have provided their approval.

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So make sure you have these legal documents approved in the proper fashion at a properly

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convened shareholders meeting or a board meeting.

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You should take the advice of a qualified legal professional to handle these procedural

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matters since there might be quite a few legal processes you need to follow for these approvals.

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While you will find the basic legal documents for stock options here in ATEM, you will need

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to complete certain other legal compliances with respect to your meetings etc. that are

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very important.

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So please take the appropriate legal guidance.

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So to recap, the shareholders first approve the broad stock option terms by passing a

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resolution.

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Then the board creates a specific stock option scheme by passing a resolution.

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Then the board grants a certain number of stock options to certain specific people at

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certain terms by passing another resolution.

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Once the board has approved this grant of options, you then give out the grant letter,

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the option certificate and the stock options agreement to the employees.

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The employees sign the agreement and return a copy to you for your record.

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The stock option agreement is the legal contract between the company and the employee.

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So please ensure the agreement is drawn up and signed properly.

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If you need to increase the number of options approved by the shareholders, you need to

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hold another shareholders meeting and pass another resolution.

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So remember the key decisions about the company are taken by holding these shareholders and

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board meetings.

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And these are important legal events.

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So hold them and record them in a proper manner.

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According to law, do not take this lightly.

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A verbal approval obtained from only one of the directors casually over a telephone call

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or a cup of coffee may not be sufficient or legally valid if you do not have proper legal

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documents to back it up.

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Do it the right way with proper documentation.

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Your legal counsel will help you with this.