Final Fantasy VII takes place on Gaia, a planet with its own life force, referred to as The Lifestream. The Lifestream is the collection of the souls of every living organism on the planet. Each living thing is given part of the Lifestream at birth, and then the life force is recollected at death, so the cycle is continuous. Thousands of years before the game takes place, Jenova, a world-devouring alien lifeform, attacked Gaia and the Cetra, the ancient race that inhabited Gaia. The Cetra worked with the Lifestream and together they protected the planet and captured Jenova.
Now, thousands of years later, during the game, a new civilization of humans had been established and formed many cities, settlements, etc. In the city of Midgar, a mega corporation had been built called Shinra Electric Power Company. This company is the largest economic entity and also serves and the de facto world government. The company has garnered power though their ability to tap into the Lifestream and convert it to Mako energy to power everything. This is viewed to be detrimental to the planet. After establishing themselves as an energy corporation, Shinra turned to biological research and military, developing many laboratories and a large militia, titled the SOLDIER unit.
During excavations of the planet, Shinra found Jenova and contained her inside one of the Mako reactors for experimentation. Shinra labs studied Jenova and her unique properties before trying something drastic. Shinra started a program to create the ultimate supersoldier by injecting some of the leading SOLDIER’s with Jenova cells. As a test, Head Scientist Dr. Hojo injected his own son while he was still in the mother’s womb. After his mother died in childbirth, his father raised this child. He grew and became part of the SOLDIER program at Shinra, and rose to the top of the class before learning of his true origins. Afterwards, his hatred for Shinra and for everyone in general grew until it encompassed him. He adopted the name Sephiroth and recovered the remains of Jenova in an attempt to injure the world so he could absorb the resulting concentration of life force and control the planet. He searched for and found the Black Materia, which gave him the power to cast Meteor, which would strike the planet. (Materia are orbs of crystallized life force from the planet that allow for the use of magic spells)