Europe Backs ‘EU Inc’ — But will it go all the way?

0:00Mike Butcher:Welcome to Path Founders, the new tech media title covering tech entrepreneurs who code, the capital that backs them and the consequences. Please do like and subscribe to help us grow so we can bring you this journalism for free. Yesterday, something big happened in Europe. The EU Commission put its weight behind a proposal to create a sort of Delaware company structure commonly used by US startups, but this time for Europe, dubbed EU Inc. In fact, that idea and the name emerged from a small number of founders and investors in Europe who came up with the proposal originally. EU Inc is a proposed standardised company structure for a new digital holding company in the EU.

0:45Mike Butcher:It aims to streamline incorporation and management processes for start-ups and small businesses. It has four aims. Standardised company structure with a harmonised corporate governance, a single unified online registry of companies and EU fast investment which is a simple investments instrument inspired by convertible notes like safes etc and then EU ESOP or an EU-wide employee share option scheme with standardized rules to attract and retain talent joining me to discuss the latest news emerging from the commission is Andreas Klinger founder of prototype capital and a co-organizer organizer behind the EU Inc.

1:28Mike Butcher:initiative. Welcome to PATH founders, Andreas. Hey, Mike. It's an honor. Thank you so much for joining. So what we need to just unpack quickly here is what's actually happened, because Ursula von der Leyen, who's the president of the EU Commission, made an announcement yesterday that they were doing EU Inc. in a certain form, but it didn't necessarily hit all of the numbers that you guys are after. So what's your kind of initial reaction? Okay, to quickly set context, there is the EO Inc. community proposal, as you mentioned, and there's now like a proposal by Brussels that they also call EO Inc., which is either a very good sign of like, hey, we're listening to startups or a horrible branding effort on my end, you know, a horrible communication effort on my end, one of the two.

2:15To explain the main difference, the core goal behind EO Inc. is to create a standard so So that you as an investor, if you have ever invested in any European startup, let's say Lithuania, and you want to invest in the next one in Poland or in Portugal, doesn't matter. You're just like, hey, I know what to do. My lawyers would know what to do. I get the same document I got last time. I click on a button I have invested. That's the main idea. Rapid, fast deployment of large amounts of money should be possible in Europe without any hacks like using a holding company in Delaware or all this kind of stuff.

2:48The reason why we need that is quite simple. Europe as a market in early stage investing is brutally fragmented, which every founder can sign because it's really, really hard to raise your first investments in Europe because you basically can only talk to local angels outside of a few larger markets that are big enough to have people used to that kind of legal entity in France, for example, because it's just big enough. The idea behind EO Inc. to Repeat is that standard. The problem we have with the new proposal from our end is to avoid an unanimity vote, unanimous vote. They went with a little workaround, which basically means that they keep everything on national level and just make it the same way.

3:34Or differently put, as a software person, imagine every country gets the same spec and customer request, but does their own software implementation, gets their own bugs, and then does their own bug fixes, also does their own UI. So very simple, very different.

3:52Mike Butcher:And that's not really what you were after, because also I gather that they're going to be doing a thing where local courts will decide how an EU Inc. company operates, and that's quite far away from what you're after, correct? So what we originally pitched for, and what also the president originally promised, was a 20th regime, which basically means it's a big deal in Europe that's like a European-level entity, you know, and it's also like there's special articles, you need, like, everybody needs to agree it's like a big deal in Europe. What we got instead right now is a national solution. The hot fix that we are thinking that is possible to make this still somehow work is saying, yes, the implementations are national, but let's not use national courts because every country has different business practices, understanding of like legal systems and so on and so on.

4:45Let's use a centralized court on European level instead and also let's use a centralized registry because each registry is different, has different practices but if we have a centralized one we can a productize legal expectations. So for example you could say KYC and AML and UBO is exactly the same everywhere you know and b you by doing that you can also standardize a third-party ecosystem or differently put a bank could accept your company and they open a new account for you with one click because it's exactly the same and it's like up to the standard that they need.

5:19Mike Butcher:Yes and the commission's proposal seems to be something called a business registers interconnection system or BRIS which knits together national registers and you're saying that's not good enough correct? That's a fairly old, fairly horrible harmonization thingy. I think generally as an engineer, I think it's way more effort to make that thing work, a part of being better or not. Just making that thing actually work to the level where it needs is like 100 times more effort. And we're talking legacy software here. And presumably that would be followed by a central register as a second step but of course there's no timeline on how that how long that would take yes also if future promises and future expectations would be a solution path we would already have now like an actual 28th regime so right now what we advocate for is that every decision that's currently made needs to be active day one as private resource so eu courts day one registry day one because everything can happen in future nobody knows you know but we can't really europe cannot allow to it doesn't have the time essentially for that right um ursula von der leyen also uh said that uh the leaven the bread shall we say by by proposing uh things like existing social structures and label law including employees rights to participate in companies book company boards which doesn't sound super startupy to me um and and other kinds of things what do you want to happen from here on what sort of pressure do you want to put on the commission uh in the next the next few days weeks and months so um just to quickly give context um taxes and employment protection is pretty much the two things that countries ultimately really care about and every country should be at least in our theory in favor of getting more investments into their market you know so we by default always advocated for just like keep taxes and employment outside of it for now, not because we think it's perfect, just because we think that's a compromise needed to get anything done in Europe, because in the end it's a loose network of countries and not like one big country.

7:40The quote-unquote pressure of the next weeks actually needs to come from us, from the community, but also it needs to actually come from leaders of countries. Right now it's up to the council, it's about the leaders of the countries, it's about the European Parliament to actually say let's not like talk about the details here let's talk about the principles here like is this actually like fulfilling the core goal and the core goal is like creating a standard that facilitates fast large-scale investing in Europe you know and actually allowing to build global competitive companies from day one in Europe and currently doesn't so if this is like right now from our point of view this is as much the job of the country years to demand more, which is counterintuitive because obviously they would prefer a national solution.

8:28And it's the job of the parliament not to get lost in the details, but like figure out, is this actually solving the core problem? And as a startup industry, right now we're saying no, it does not. And right now we believe that if you actually want to invest quickly a million, a hundred million, billion into a startup, you will still go with Adela because you know what to expect in case of dispute.

8:49Mike Butcher:So the next phase, it sounds to me like your lobby group putting pressure on national heads, in fact, and the Council of Ministers at that EU level. What are the economic arguments that you can put towards them that would move the needle on this initiative? Say, for instance, being able to scale up defence startups, for instance, which is very hot along with AI right now. Is that the focus now? And what sort of economic arguments? How much capital and how much growth could you unlock with EU Inc.? The reality is like almost any high productivity industry of the last 20 years, Europe didn't keep up with.

9:32And the main reason is that now, because of the Internet, everybody competes globally, they won. And we didn't win in software, we didn't win in cloud, we didn't win in AI. Now we are risking to not win in robotics and so on and so on and so on. This will just keep on going because the way you build now global companies is with high risk investments. Very fast early stage startups and investments. And many people in Europe still think that startups are small medium enterprises. They're not. They're tech innovation companies competitive globally day one. And they either have the infrastructure here in Europe to be able to compete or they will just leave.

10:11and that's the reality. And this is not like I can bring any kind of economic number you want. The ultimate question is like how many new GDP driving companies do we need in Europe and how many can we afford not to have? And for a country leader, like pick your biggest 10 companies you have right now, how much would it be valuable to you to have another 10 of those in the next 5 to 10 years? You know what I mean? And that's the promise of startups if the infrastructure actually works. And the problem we have in Europe as founders, as investors, we don't have that infrastructure.

10:44Mike Butcher:A hack that some startups have used over the last few years has been to get a UK limited company, which is often very amenable to US investors, for instance. Do you foresee a future where the EU Inc. infrastructure could trump that card, that UK limited card? Or do you think even perhaps the UK might be able to participate at some point? So in our original proposal, the way we designed it, and this is why it was so important to us that it's actually a new thing on the European level and not like a massive thing between all of them, is to facilitate that other countries could theoretically also join, even if they're not part of the EU, including the UK.

11:25That was the original idea behind this, one of the many ideas behind it. And I agree, like I used to have a UK limited because at that point back then the UK was, like London was Europe's New York and the UK limited was our delivering, right? The problem you have in Europe is that, as you know, the UK had the Brexit and therefore it's like very, very hard to align incentives here politically. So I don't see if I as a founder have to do a holding company, I might as well do it in Delaware. Like there's no point in doing it in the UK, unfortunately, as much as I'm a fan of the UK and London myself.

12:01Mike Butcher:Well, clearly that's the prize to get a Delaware style company across the whole of Europe and get that capital in and allow companies to scale internationally across Europe and internationally. Andreas, thank you so much for joining PathFounders. We'll be watching the initiative with interest and we'll be keeping our eye on the commission's next moves. But for now, thanks so much for joining PathFounders. Mike, it's an honor and a big fan of what you're doing with PathFounders.

12:31We'll be right back.