Study the picture below, which came from step 3 of https://ohai.lulzbot.com/project/mini-104-y-axis-assembly/mini-v104/
One of the toothed pulleys is shown, already mounted on the motor shaft. One of the grub screw holes is visible, just below the teeth, in the wider part of the pulley closest to the motor. Looking at the shaft below the pulley, you can see the “flat” part of the shaft is aligned with that visible grub screw hole. The other grub screw is out of sight in this photo, on the back side of the pulley.
As for how tight… The only way to be 100% sure is use a torque driver and torque to 5 inch pounds as the instructions say. The screws just need to be “snug”; 5 inch pounds is NOT much force and they can be stripped if over-tightened so be careful or get some hands-on help from someone mechanically inclined if you’re not sure. One screw must be aligned on that “flat” part of the shaft, and both just need to be snug enough that they won’t loosen from vibration.
If the screws are loose, or one is not tightened onto the shaft’s flat, then there can be “play” or “slop” between the shaft and pulley – meaning the motor shaft can turn slightly without imparting all of that motion to the pulley – and that can cause shifted print positions.