Entrepreneurs and investors launch EU Inc. in a push for a single pan-European startup entity

Posted by Admin October 14, 2024 Tech

Imagine it’s 2035. Europe’s first trillion-dollar tech company, founded in a garage in Krakow, now employs 120,000 people across the continent. A pan-European team leads the world in quantum computing.

Europe has become the home of the world’s most valuable and innovative businesses, and a magnet for top talent in robotics, climate tech, AI, manufacturing and beyond.

This might sound far-fetched. But it doesn’t have to be.

Today a coalition of Europe’s most successful entrepreneurs and investors has launched EU Inc, a timely and groundbreaking initiative to create a single pan-European startup entity.

The proposal captures the grassroots momentum and clear consensus that has emerged among European policymakers and founders: that regulatory reform is vital to transform Europe’s competitiveness, and position the region as the global epicentre of innovation for the next generation.

The initiative, outlined in an open letter signed by tech leaders from across Europe, calls for the creation of an ‘EU Inc’ entity under the 28th regime (EU rules offering an alternative to national laws).

The new structure would standardise investment processes, simplify cross-border operations, and create a unified employee stock options framework – all of which will help European startups to scale rapidly, attract more capital and have a better chance of becoming a breakout success.

The proposal adds to the momentum already building in Europe, with Mario Draghi, Enrico Letta and EU Commission President Ursula von der Leyen all calling for reforms to address innovation and competitiveness

I spoke to co-initiators of EU Inc., Andreas Klinger, investor with Prototype Capital and former CTO of Product Hunt and Simon Schaefer, Founder and CEO of Factory and member of the Advisory Board at Allied For Startups and angel investor, to learn more.

According to Klinger, we have six weeks until the new EU commissioners start working on their agenda for the coming years.

“One of the first tasks they have is defining the work for next year, and the next five years. If this is one of the top issues, it has a high chance of success within the next few years.”

The proposal builds on the success of previous efforts such as European Accelerationism, promoting the needs of European founders, and the Not Optional campaign for European stock option reform. With the political will already present, the EU Inc coalition believes that policymakers can and should execute reforms swiftly.

What are we talking about in practice?

The concept of a 20th regime within the European Union (EU) refers to a potential legal framework that would allow member states to opt into a specialised legal system for specific use cases, essentially creating an “optional 28th country” within the EU. This framework would enable countries to collaborate on particular issues without requiring full integration or adherence to all EU laws.

How It works in practice is through optional participation.

Member states can choose whether to engage with this regime based on their specific needs or interests. This flexibility allows for tailored legal solutions that can address unique challenges faced by individual countries or groups of countries.

Countries opting into this regime would operate under a distinct set of rules that differ from standard EU regulations. This could involve creating new treaties or agreements that define the scope and limitations of participation.

It creates a vehicle to facilitate deeper cooperation between member states on pressing issues without the necessity of unanimous agreement across all EU members, thus expediting decision-making processes.

According to Schaefer, ‘there is no modern corporate law anywhere in the world that really embraces technology and startup entrepreneurship. Maybe we’ll successfully be the first at something.”

The regulatory landscape across Europe is complex, with significant variations in tax treatment of equity compensation. In some countries, employees face heavy taxation on stock options compared to capital gains taxes that founders and investors enjoy.

This disparity discourages companies from offering equity as a viable compensation strategy.

Countries like Germany have particularly unfavourable conditions for employee equity, making it less attractive for both employers and employees.

In the case of startups, Klinger explains that it could mean that “you would standardise certain parts of corporate law, which would benefit employer equity.”

International startup investors are shunning European companies over complex legal bureaucracy

Klinger highlights the main problem in Europe: that, in practice, all of the different startup ecosystems are siloed.

“No Slovenian investor will touch a Portuguese entity because of tax and legal implications, it’s an administrative headache.

Compare this to the US, where a Chicago startup can easily get investors from both the East and West coasts.

This won’t happen in Europe. So it’s a completely different level of liquidity, with small countries especially locked in.”

Klinger and Schaefer also believe that an EU Inc. would incentivise international investment. Klinger gave an example of the kind that I’ve heard from several founders and investors:

“One of the edtech companies I invest in had the best edtech angel in the world joining their very first round — bringing in over 50 per cent of the company’s investors.

“Then all of a sudden, like three weeks before the actual closing, the guy sends an email. It’s like, ‘Hey, I just realised this is a German GmbH. I’m not doing this. It’s five weeks before Christmas. This will drag into Christmas. I have no interest in doing this over my vacation.

Call me next round. And he literally dropped out.

I have had another angel who was considering investing $20,000 in a Slovenian company. And his lawyer was like, ‘Yeah, I looked at the paperwork. It’s doable. But we should get a local lawyer. And I would like to sit down with you in the afternoon and just explain the legal differences in detail so that you know what you’re signing’ and the angel was like, ‘I’m not doing this for $20,000. That’s not worth my time.”

Designed with and for the startup community

And in terms of application, Schaefer notes that the people signing up to the petition are not only willing to support but actively contribute to implementation. “That’s what we also want with this petition.”

Schaefer shared:

“It’s important that this is not the 28th regime designed somewhere in the back roads of Brussels, rather, it’s something designed with and for the startup community.”

The movement is gaining momentum

Schaefer believes that logic and reason will guide this endeavour, detailing how the startup economy has been discussing the fact that the sector is lagging behind without interruption for the past 10 years.

“It’s finally becoming a political agenda. Current legal parameters like due diligence, KYC, and beneficial ownership were designed in a corporate law framework from before the internet.

How is this corporate law supposed to regulate innovation that’s so fast-paced? I think based on that, arguing with urgency and based on reason, I think we will get people excited to join with all of the startup community.

The EU Inc proposal aligns with multiple high-level recommendations and political
commitments, including:

Mario Draghi’s report on the future of European Competitiveness from September 2024,
advocating new EU-wide legal statute for ‘Innovative European Companies’;
Enrico Letta’s report from on the future of the Single Market from April 2024, calling for a
European Code of Business Law under a 28th regime;
European Commission President Ursula von der Leyen’s political guidelines for
2024-2029, supporting innovation, competitiveness and smarter regulation.

He asserts:

“There’s political will behind this. Van de Leyen, Draghi, everybody has mentioned the 20th regime.

But they don’t really know what the details are. Here’s where the tech industry can help, not simply replicating another 300 page Draghi report. The 20th regime, if you’re generous, is actually one paragraph.”

Bring unicorns and founders back to Europe

The initiative will incentivise early-stage innovation, especially among founders who left Europe in response to the complex bureaucracy.

According to Schaefer:

“I think ultimately, government is a service to its people. And in terms of corporate law and founding a company, government have miserably failed in every European country.

It’s so hard to do all of these things. Forget closing a company, let’s not even go there. So, to make this service so good and so compelling, it will create a FOMO for other member states and other countries.”

Schaefer cites Portugal as a country where second-time founders are active in policy. The government’s support of startups has resulted in many Portuguese entrepreneurs returning.

“It’s a strong message to say, ‘We have what you need to found your company The easiest, fastest way, and everyone can invest.”

Klinger wanted to stress:

“This isn’t about improving administration and making bureaucracy a little bit nicer and all this kind of stuff.

This is effectively unifying the European startup ecosystem. This is about making sure that founders in middle of nowhere Europe have enough access to angel investment, have enough access to VC because just borders all of a sudden got bigger. And that’s the magic in this.

If we manage to do this, this could be the first step to creating a single European startup ecosystem. And that’s actually interesting because then all of a sudden, we could compete as a continent, and that would be a complete game changer.”

Among the first signatories are: