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EU Inc: Uniting Europe’s Startup Ecosystem or an Impossible Dream?

EU Inc: Uniting Europe’s Startup Ecosystem or an Impossible Dream?, TheRecursive.com

Imagine there is a standardized pan-European corporate structure? EU Inc. How easy would it be, scaling across Europe and beyond? That idea united more than 8400 supporters in a matter of few days. Founders of companies such as Stripe, Wise, Wolt, and DeepL, among investors from Index Ventures, Sequoia, and Atomico, signed a petition to unite the startup ecosystem in Europe.

The dream is not a new one, and the obstacles are still palpable as ever. However, many believe the moment is right, as well as the momentum. There are 6 weeks left until the new EU commissioners start working on their agenda for the coming years.

Getting the regulators to listen to the entrepreneurs, investors and broader business community wasn’t always fruitless, but it was slow, inefficient, and tedious. The expectations only grew as patience dwindled. This time, recent reports on the EU’s competitiveness and scale-up gap are not favorable and the new mandate of the EU’s Parliament and Commission will be under pressure to make more substantial changes…

EU Inc: What is it about?

You’ve probably heard a lot of benefits about the EU’s single market, and if you are a founder – you already know that many of them are not working in reality. European multitude of countries, cultures, legal and regulatory compliances, are stifling cross-border commerce and collaboration.

EU Inc: Uniting Europe’s Startup Ecosystem or an Impossible Dream?, TheRecursive.com
EU Inc petition led by Andreas Klinger, Philipp Herkelmann, Simon Schaefer, and Vojtech Horna managed to gather thousands of signs from the ecosystem. | Source Image: EU Inc

The petition for EU Inc aims to establish the institutional foundations for Europe’s future competitiveness through a new entity that would:

    1. Standardize investment processes to enable genuine pan-European investments.
    2. Establish a unified employee stock options program to share startup success more widely.
    3. Simplify cross-border operations, such as employment and capital flows.
    4. Fully digitize the incorporation process, reducing it to just a few hours – entirely in English and online.

Why it might not work

The sheer complexity.

Even though “EU Inc” could theoretically simplify operations, many investors and founders shared online and with The Recursive personally that it seems unlikely to be implemented in the near future. The process could take years due to the inherent political and legal complexities of harmonizing corporate law across 27 countries.

The Limitations.

Founding Partner at SMOK VC, Borys Musielak shared that he signed the petition but is skeptical about its outcome, suggesting that a new legal entity would require its own court system, independent taxation system, and trained professionals. He also believes Estonia could be a better alternative than creating a whole new framework like “EU Inc.”

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Smeraldo Meminay, CEO and founder of Blinkoo, also points to a critical issue— local tax incentives tied to national systems.

For Italy, Spain and France, having the company abroad means not having local investors (which for pre-seed and seed it’s often necessary). I wanted to move to a DC-Corp to onboard American investors, but I couldn’t because my current investors would lose €3.5M of tax incentives.”

Different countries in Europe have different investment incentives for startups which could deter local investors from supporting startups that opt into an “EU Inc” structure. That leaves the whole pan-European idea with a bigger problem of restructuring and aligning these incentives across the EU.

As the US attorney in Poland – Dominic Kisielewski explained, in Europe we are dealing with sovereign countries in comparison to the USA’s Delaware (where many American and world startups incorporate) which is a state within a sovereign country – the United States.

Additionally, the American legal system, including Delaware’s corporate body of law, is based on the common law system which is more stable and precedent based than Europe’s civil law traditions.”

The Resistance.

It is no news that corporate law in Europe is outdated and often unsuitable for innovation, but the deeper issue is that corporate law varies significantly across countries. Reforming or harmonizing these systems could face strong resistance from individual EU member states that want to maintain control over their legal and tax systems.

There is also the issue of slow adoption of the Societas Europaea (SE) legal entity introduced in 2004.

Fewer than 5,000 companies have used the SE framework, which was intended to simplify cross-border operations, which might indicate that European companies have been reluctant to embrace pan-European structures.

Why it might work

Everyone could benefit from it.

The central appeal of “EU Inc” is its potential to standardize corporate laws across all EU countries. This could simplify operations for startups, allowing them to scale more easily without needing to comply with multiple legal systems. If investors have a unified set of laws and regulations to work with, they may be more likely to fund startups in smaller or less developed EU countries, helping to spread startup activity more evenly across the bloc. Take for example, an investment agreement between a CEE company and an investor in Luxemburg, proposes Kisielewski.

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In such situations, one party must agree to laws of a foreign country just to get a deal done, which increases the risk of a dispute arising and places one side at a disadvantage in such a dispute. Small startups often lack the budget to consult with attorneys in a foreign jurisdiction and feel additional pressure to agree to such an agreement without fully understanding the risks.

An EU Inc. framework, assuming it would create a harmonized EU corporate statute, could help in addressing these issues by allowing all Parties, regardless of their home country, to enter into agreements on a level playing field with both Parties being able to more fairly assess risks within such agreements.”

Startups also struggle with different rules for employee stock options across various countries. “EU Inc” proposes to create a unified stock options framework that would apply across the EU. This would make it easier for startups to retain talent and offer more standardized compensation packages, which could attract top talent from other global tech hubs.

Last, but not least, a pan-European set of rules could reduce the regulatory complexity and make Europe (EU) more competitive globally, especially against the US.

Learnings from past mistakes.

Although the SE framework had limited success, “EU Inc” could build on its foundation. SE was designed with bigger enterprises in mind, but “EU Inc” could aim to better cater to startups and scaleups needs, commented Panos Papadopoulos, Partner at Marathon Venture Capital for The Recursive.

By refining the idea of a pan-European legal entity, EU Inc could address the shortcomings of SE, particularly in the startup and tech sector, creating a more dynamic and relevant framework for new businesses.

We might even get a chance to lead, not just to catch up.

Kisielewski points out that the US, despite being a major startup hub, actually has a complex legal system with 51 separate jurisdictions. The EU, if it creates “EU Inc,” could emerge as a simpler and more attractive jurisdiction by comparison. A unified legal entity might offer startups fewer regulatory barriers and a more cohesive business environment across Europe, actually putting the EU ahead of the US in regulatory efficiency.

Can’t Estonia be our Delaware?

Many ecosystem stakeholders take the US example, Delaware’s corporate legal system, as an inspiration for the incorporation of European businesses. Certain aspects of Delaware’s corporate legal system, such as having a specialized court for corporate matters, could be of benefit to the EU, pointed out Kisielewski, but he doesn’t agree with the vague idea of a “Delaware model” being a solution for Europe since Europe possesses fundamentally different political and legal systems from the US.

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“I think the proper direction of the discussion should be about creating a unique European solution that can incorporate certain aspects from Delaware’s corporate legal system, or even the US legal system at large, but I do not see a solution in which Europe fully adopts the Delaware model as practical.”

Some also believe the EU could better focus on making one jurisdiction, like Estonia, a competitive alternative to Delaware’s, rather than creating an entirely new pan-European structure. And there is no doubt Estonia is one of the best examples of how easy starting and running a company should be. Serial entrepreneur and founder of Uniborn, Dmitry Samoylovskikh thinks Estonia could pull this off because they had the advantage of starting from scratch after the Soviet era: “They didn’t have to deal with legacy systems. And being a small country, they needed to make it easy for startups to operate if they wanted to attract talent and entrepreneurs.”

“When founders don’t have to move to a different country just because it’s easier to do business, they stay local, attract talent, grow, exit, and recycle the capital. Look at the US — startups register in Delaware, but they don’t move there.”

However, Estonia has its own set of issues that implies national solutions will always be influenced by particular national strategies. Due to rising military spending, Estonia introduced a 2% corporate tax, which is a notable change for a country previously known for having zero corporate tax, Dimtry comments. It doesn’t help that the Estonian Financial Supervision Authority has made it extremely difficult to set up venture funds unless the management team is entirely Estonian.

In the end, we need to be aware that in Europe we are dealing with sovereign countries with very diverse jurisdictions. We might need pan-European solution just to get everyone on board and harmonize the law. How hard will it be to get everyone on board? Maybe not as hard as we think taking into account a considerable amount of ecosystem stakeholders advocating for this and signing the EU Inc petition

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Ana Marija is the Editor-in-Chief of The Recursive. Even though her beginnings go back to mainstream media, her passion for technology prevailed. She polished her journalistic and editorial craft at Croatia's Netokracija, where she covered topics from startups life to software development. She oversaw the production of various video and content projects, as well as community events - but most of all she enjoys sharing valuable experiences of the founders, developers, and technology experts.