Can EU Inc Become Europe’s Delaware?

Speaker A: Politics today feels like one endless shouting match. That's why I recommend the Future of Freedom podcast. Each episode takes a major issue that's facing America and brings together two thoughtful voices from the right who see it differently. One might be more libertarian, one more conservative, but here's what sets it apart. It's not a debate. There's no interruptions. Each guest gets the space to explain their position, and then you decide what makes the most sense. Check out Future of Freedom wherever you get your podcast.

Speaker B: If Europe says the 28th regime removes fragmentation, why does it still look like a company is trying to sit on top of 27 legal realities? Can the EU Inc. Become Europe's Delaware moment? Or does it fail on the one thing investors actually price first, which is legal certainty? Welcome to startup Brad IO, your podcast and YouTube blog covering the German startup scene with news, interviews and live events. Joining me today is Nicholas De Beier, deputy chairman of the German Business Angel Association Band, founder of BAI and founder of Iris analytics, which was later acquired by IBM, as well as the Business angel of the year, Nikolas. I believe this was 2022, right?

Speaker C: No, 2020.

Speaker B: 2020. Okay. And, uh, you can, of course, look at the previous interview. So who better to pressure test whether the 28th regime is a real operating framework or just a cleaner narrative for the European company law? Hello and welcome, everybody. So, are we finally looking at the first serious attempt to. To make Europe one investable corporate space? Nicolaus, welcome. So, should we start with the simplest version of the problem? What is actually broken today for a founder, uh, who wants to build across Europe?

Speaker C: Yeah. What happens is, I mean, the European Union is always talking about a single European market, but it is not yet. We have 27 nations, countries, each of them having their own legal system. And although the legal systems are somehow harmonized because of the European Union, it's still the case that, um, when you found a startup in one country and in another country, it's different legislation.

Speaker B: It is. Never forget employment law, taxation. Always a bummer.

Speaker C: Yeah. So, effectively, in this space, we don't have a single market yet. And if we are looking at, for instance, the United States, they. I mean, they have their, uh, they have the different states, they have different rules as well, but it's much more harmonized. And I mean, everybody, um, active in the startup space knows the Delaware Inc. Which is the standard company type for startups.

Speaker A: Yeah.

Speaker C: Uh, this is something we don't have yet in the eu. And for me, an investor, this means every time I want to invest internationally, I need to learn a new legal system and how it works. And when you as a founder have a growing business and want to expand into other countries, you have to learn again how it works. And this is creating overhead. This is some hassle. And uh, particularly from an investor's perspective, that means that many say, oh, I don't invest abroad, I just invest in my home country.

Speaker B: I see. Is this the single biggest operating problem the 28th regime is trying to solve? We may add we do have 90% European audience, but we may add that we have 27 states in the European Union. So sitting on top is the 28th regime. That's where the name comes from.

Speaker C: Yeah, that's the idea to add another set of corporate rules so that you have the so called EU Ying ink type, which means the corporate law will be the same regardless whether you set up your startup, uh, in Denmark, Germany or Spain for instance. And that is from my perspective, very interesting and sounds like a huge opportunity because it makes things much more easier. And also what is being promised by the 28th regime is to have it as a general principle, it's digital only. And it's once only means if you supply your company address and company name and tax number, uh, to the EU Inc. System, it's not going to be requested a second time from any governmental body or so. And you don't have to use paper for any corporate affairs because it's digital only. Which as per today is not the case.

Speaker B: I vividly remember somebody I talked to a few years ago, they had a requirement for an official stamp, an official seal, um, on some paperwork. And they really got Stanford University scrambling to find that again. I remember stories like that. Um, I was wondering, is fragmentation. We've been talking about 27 different states, 27 different but increasingly harmonized legal system. Is this the root cause or is fragmentation just Brussels language for deeper, uh, failure in capital formation?

Speaker C: I wouldn't say it's root cause. What we are looking at with the EU Ying Inc. Is to advance, let's say, I mean startups being founded everywhere and are run everywhere in Europe. What we are aiming at is removing unnecessary overheads and making it more easier. It's like advancing.

Speaker B: When a founder asks why is this easier in Delaware than in Europe? What is the shortest honest answer? Uh, he's smiling, he's smiling for everybody who's listening to that.

Speaker C: Yeah, I mean I'm in German so I have most experience here in Germany. So let me give a couple of examples when you want to, from a German perspective, if you want to found a business in Germany, one thing you have to do is you have to physically go to the notary and they are. Yeah. And you have to sign, assign, uh, the role over there. You have to be present.

Speaker B: Oh, and we may add that they reading out the whole contract, um, loud. So that means not everybody knows it and it's just a signing ceremony. But you sit there, depending on the length of the contract, for hours.

Speaker C: Yes. I mean I recall one notary, he was once telling me, you can dance in this room, you can sleep here. The only requirement I have is you have to be in the room. And if someone in between has to go to the toilet, the whole procedure will pause for like five minutes because not everyone is in the room in the same room. Uh, and I mean when you're at the stage of founding a company, this is probably not so complicated. But when we're later on then talking about financing rounds, uh, or an exit, then it gets complicated because then you have to like 10, 20, I don't know how many people have to be in the same room or they need a power of attorney. And this is then becoming increasingly complex. If you have people from abroad involved, like you have an international investor and he needs, if either he comes, he flies into the country and is present, which means costs days of time wasted or he gets the power of attorney so someone else can represent this person. But if you're coming from abroad, you have to go and find a notary, which is something very uncommon outside of Germany. And then you also have to go to the embassy and get an apostille which then certifies that uh, the notary has done something. Correct. So this is just very complicated. And if I invest in a UK company, for instance, it's just a docusign so it's much faster and more convenient. And you have so many US investors who say, okay, I like your product, you guy from Germany, but I mean, let's stay friends. I won't come over from this. I am going to invest my money in the UK company. And this is happening so often and vice versa. Founders are saying, I'm going to set up shop in the US or in Estonia or wherever or in Switzerland because it's much easier there to this all bureaucratic overhead.

Speaker B: I was anywhere wondering when you talk about Delaware, it's one of the smallest states in the US where basically everybody's domiciled if they're are not a few states. I do have one suspect in mind, uh, who is gunning for their business model as well. Here in the European Union. But let, let, let us put ourselves in the shoes of being an entrepreneur. Let's say you Inc. Gets live like this week, next Monday. If that works exactly as, as advertised, what changes first on Monday, on the next Monday morning for a founder, I

Speaker C: mean this then heavily depends on the national laws of the country where he's founding the company in. Yeah, I would say um, the you, you need uh, some basic training in what EU Ying is and how it differs from, from uh, from the company. Take like a German GmbH or an SAS in France. How it, how and where it differs. But I don't think that this is like uh, a multi week learning course. This will be some um, I mean probably your law lawyer will explain to you. The promise is that um, it is the, the differences are not so huge to a typical limited company type so it will not be difficult to learn it. And uh, once you've done it the first time, I think you're pretty easy pre easily prepared for the next one or for the next fundraise. So it's, it's not, it's not rocket science. I mean I've read the proposal and from what and it's not yet being accepted by the EU uh parliament. So it's not in force yet. But what the current proposal states it's not, it's not going to be rocket science. If you can found a limited company you will also of the national type, you will uh, be able to found it in the EU Ying style.

Speaker B: So there's no real big difference on the first Monday morning when this becomes reality.

Speaker C: I mean what have they done in the EU commission? They have looked at different countries at what works best in each country and they have tried to take the best of the uh, national uh, laws and they have been, I mean one has to say there has been uh, an initiative, the EU Inc. Initiative who initiated the whole process with a proposal. But there has also been a consultation process from the EU commission last year where, where they have been um, many interviews with people from the ecosystem. So they have listened to what are the requirements of the ecosystem.

Speaker B: That uh, that's already a very important piece because if you listen to the people from the ecosystem you usually come up with good and pragmatic solutions. Um, part of the EU Inc. Is a 48 hour incorporation. If that actually works. Is it a breakthrough or is the speed just secondary to trust and enforceability of this new legal construct?

Speaker C: I think it will be some kind of breakthrough. Yes, I'm aware. I mean it's not like only founding a company. It is also of uh, because of you need a tax ID and a value added Tax id, such stuff. And I know stories of founders here in Germany who've been waiting like three to four months for their tax id. Which means if you don't have your tax ID you cannot write any invoice, you cannot earn any money. This is just ridiculous.

Speaker B: You cannot deduce any VAT here in Germany.

Speaker C: So um, you. So this is going to be sped up. I mean can you explain me why you should wait four months for a VAT number? I mean it's just a random number.

Speaker B: So I, I have to admit I, I'm physically located very, very close to you. And I assume we do have the same uh, finance apt who's responsible for that. And I always have gotten my VAT number um, in like a week, two at the most. But you have to say you write them an email but they can't reply via email. They write you back a letter, but for a letter they are fast.

Speaker C: Yeah, that's right. But I know stories of founders who've been waiting for months. Not in Frankfurt where we are located, but in other areas of Germany. And this is just ridiculous because you cannot, if you cannot write any invoices, you cannot start your. Effectively start your business, you cannot pay your employees and so on. And this is another big breakthrough of EU Inc. Because they say, or the law says. No, it's not a law, it's a um, well you know uh, um, the um, EU yin.

Speaker B: Let's stick to the term regulation.

Speaker C: Yeah, that was. Thank you.

Speaker B: That covers all of it.

Speaker C: So the regulation says you have to complete the initial process within 48 hours. And this also includes granting a tax number. And this will be then much faster than most of the current national limited companies. Mhm.

Speaker B: The proposal is optional and national forms stay in place. You just referred to the GmbH, the UG and so on and so forth. So does you ink reduce fragmentation or does it just add a new route through it?

Speaker C: Well, it will depend on the acceptance. I would guess if all our so called dreams are coming true with the EU Inc. Nobody will found a startup based on the national traditional company type anymore. So fragmentation will be reduced. Or what also could happen is that the national uh, company types will be reformed that they match the quality of the EU Inc. So then we still would have some kind of fragmentation. But looking at potential future international investors, it would always be a wise idea to take the EU Inc. And not

Speaker B: the national form M. And I would say right now there's a 50, 50 chance for both scenarios playing out. Not meaning that, um, startup founders will maybe as a default setting, have the EU Inc. But rather that it can turn out very well or very bad, that they'll depend on a lot of other influences. Um, you just referring to the legal forms here, for example the GmbH in Germany. Um, I was wondering what has to be true for founder to choose this over the term, for example GmbH. Because right now a lot of investors in Germany know the GmbH that's the default model for setting up a startup. Uh, what needs to happen in order to make this really EU Inc. The default option? Does it have to be that There are also what we already interviewed, um, standard investment terms. So basically you have a standard, uh, legal entity, you have standard investment terms and it makes a process more smoothly. M meaning only the investment, uh, part here, not the looking for investors, pitching investors and all that stuff that stays the same.

Speaker C: So I mean, uh, from a legal perspective, what needs to happen. It is now in proposal status from the EU Commission. So they have now asked the national parliament for their feedback and then the um, member states have to agree on it and the EU Parliament. So there's still some legal work to do. This process will take for the rest of the year, I would suspect. And of course it still can happen that the proposal will be changed, modified because of the feedback. Um, and once this then comes into force, we can start founding EU Inks. And for that I think it will be very wise to have some kind of standard agreements to be prepared. This is something which, for instance, uh, my organization Band will do. We have been doing this for years for Germany where we have been providing standard drafts of the usual contracts together with the German Startup Association. So I mean we have the standard shareholders agreement, we have a standard convertible, uh, loan agreement and so on. So it is very likely that we will also provide a standard agreement for EU Incs and so on. And once these have been. Then once these have been developed, I mean. Yeah, let's go.

Speaker B: If, if there's a, uh, really, uh, smooth process of doing that with very easy terms like almost said that I know lawyers hate standard and they always have to be adopted. And I do believe in some, uh, in most circumstances that is true. But if there's a standard, if death are successful examples that might take the cake.

Speaker C: Can you repeat the question?

Speaker B: What has to be true for a founder to choose EU Inc. Over German GmbH in the first place?

Speaker C: What has to be true? I mean we need um, to fully follow this digital Only route if this is happening, is really happening. And by the way, the proposal reminds uh, us, uh, multiple times. It's not like a general principle. And the proposal is digital only. It says this in many clauses and just to make sure it must be digital only, there must not be any paper involved. So repeatedly. Yeah, but if this becomes true then this is a huge leap forward because then we just sit down at our computers and I mean we can still meet in person but then we can do all the contractual stuff remotely. Um, um, and by the way, this is something which works um, in other countries already, like the UK I've been saying. So if anyone is skeptical if this is a good idea to remove, to move to digital only, just look into other countries. It's working, it's no issue and it's much more efficient and it's much less expensive.

Speaker B: And I would also like to have the notary appointment in such a digital form. If there's a tool that will be just great. Nicholas, where does the proposal solve a real problem? Found a problem. Where does it still read more like institutional elegance than real operators operate reality?

Speaker C: I'd like to um, put forward two examples. Just. Yeah. First thing is the EU Inc. Is looking at a standardized employee, uh, share option program which will be the case across or which will be in effect across the whole European Union. This is something we don't have yet. When you've got um, employees working in another EU country, things are getting, I wouldn't say difficult, but different. So you know you have the single one, your employee share option plan which is very important for startups. And again it's digital only. That is a game changer. And thirdly, I've mentioned that earlier in this session when you're talking to investors, they will know uh, this kind of company type so you won't have to explain to them how it works. And they will. For them it will be much easier to invest abroad. So particularly looking at US early stage investors, they will only have to learn EU Inc. Once and not British Limited, French SAS, German GmbH and so on.

Speaker B: Mhm. So you already talked about early stage investors. Everybody knows, uh, the European Union needs to change a lot, but also in their capital allocation. And until then they need a lot of investment capital from abroad. So what is the first thing a sophisticated investor will test before they decide that EU Inc. Company is genuinely fundable?

Speaker C: You mean in general as a, as a company type? Yeah, I.

Speaker B: And by the way, when you've been talking about the E.U. inc. I uh, thought there's a Lot of market potential in Asia and North America right now for lawyers, uh, to learn about the EU Inc. And how to invest in them, but that's a different topic.

Speaker C: Yeah, I'm pretty sure. I mean, I have read the proposal, but this does not mean I'm ready to found a EU Inc. Yet. Probably what I will do is when this happens the first time, I, uh, will talk to my lawyer and get some input from him and say, what are the standard drafts and how does it look like? And obviously things are changing. For instance, um, when you're coming From a German GmbH, the list of shareholders is placed publicly in the company registry. So we in Germany are used to that. We know for every GmbH it's publicly known, the company register is the source of truth. Who owns the business? This is going to change because in the future the company register, so who's a shareholder and how much does he own is being maintained by the company itself or a trusted service provider. This is how it works in, for instance in the US or also in the uk. So it's not completely new concept, but it will change. Uh, so German investors or founders who have been working with GmbH before will need to understand how this is different now. Yeah, so we all have to learn that. But again, I don't think this is a really complicated thing. This is established best practice in other countries. So, uh, no worries. And I'm pretty sure if you're a French founder or a person who has invested in France multiple, uh, times, then obviously EU Inc. Will be different. You will have to learn the rules. That is how it works. It's a new, it's a new regime. It's the 28th regime. It, it is not an exact copy of the other 27 regimes.

Speaker A: Mhm.

Speaker B: Um, guys, if the whole promise is one European standard, but disputes, enforcement and a lot of practical reality still run through national systems, where exactly does the standard become reality? We'll be back with some more questions with Nicholas after a short ad break.

Speaker A: Politics today feels like one endless shouting match. That's why I recommend the Future of Freedom podcast. Each episode takes a major issue that's facing America and brings together two thoughtful voices from the right who see it differently. One might be more libertarian, one more conservative, but here's what sets it apart. It's not a debate. There's no interruptions. Each guest gets the space to explain their position. And then you decide what makes the most sense. Check out Future of Freedom wherever you get your podcast.

Speaker B: Nicolaus, welcome back. Delaware works because people trust in the predictability of outcomes. So what is the European equivalent of, of that predictability here?

Speaker C: I don't understand the question.

Speaker B: So uh, basically when you do incorporate a company in Delaware, there are usual disputes there, usual questions, and there's a lot of uh, legal material, um, judgments out there that you can read that you can inform yourself. So what would be the European equivalent of that? How can you build that trust? Where's the way to do that?

Speaker C: So um, the competent courts will be the national courts. Um, as everything which is new, there will be cases brought to the courts and they will rule. So we will have decisions on the EU Inc. In Spain, in Germany, in Italy and so on, um, which will perhaps will be contradictory. This could be an issue. Um, however I think we have the principle of subsidiarity both in the EU and for instance in Germany. So it happens all the time that a court from Berlin is a little bit in conflict to a court or decides differently than to a court in Frankfurt and then it's being escalated to the next level. And um, I guess this will be the case, um, in the early uh, times of the EU Ying that, that several court decisions need to be made the first time and then we will see how it evolves. Does that make sense?

Speaker B: That's basically how you build that legal trust. Um, but um, we'll still have some fragmentation in the start and for certain aspects. But I do believe that's not different from the S where ah, there's also a little difference depending on where you actually operate. Um, I was wondering at what point would you tell a founder don't use EU Inc yet The legal certainty isn't still here. Would you encourage entrepreneurs you advise you want to invest in. Would you advise them to start with an EU Inc exactly at the first day? It's possible.

Speaker C: I mean, depends on your risk appetite probably. Uh, um, from that, what I know as of now, of course, um, I suspect the proposal will not come to effect as it is being formulated now. So there will still be changes. But um, what I would not recommend to change if you've got an existing startup to change, let's say from a GmbH into EU Inc on the first day. This probably doesn't make sense. In this case I would say, okay, let's do this next year and to see how things work out, um, and maybe let some other people who are more eager to try it out, uh, found the first EU Ying like if you're very much in a hurry, then maybe stick to the old form and convert later. But generally it doesn't look like you have to, you have to wait for four years or so to before you found your, your EU Inc. Mm mhm.

Speaker B: We also may add that for larger companies there's already an SE associate Europa, um, that larger companies do adapt but they're very much uh, bigger, very much late stage. So um, the proposal allows €0 or €1 minimum capital, digital share transfers and instruments like SAFE. So is this finally Europe becoming venture compatible or am I just simply reading too much into it?

Speaker C: I mean I would say it's pushed towards reality. Yeah. Why? Because I mean the nominal capital we have, like when you found a GmbH you have to pay in €25,000 and then you've got 25,000 shares of €1 each. But um, it does not make any difference whether it's €1 or €25,000 or €50,000 for typical startups. I mean they are uh, raising much more capital and like €25,000 you burn in less than a month. So the concept of that, this is uh, the capital amount that um, you're responsible for is not realistic. So if your business goes bust and has a nominal share capital of €0,1 or €25,000 doesn't make a huge difference. So this is a reality check. The second thing you've mentioned, the Safe um, is also a very good aspect of the um, EU Inc. Because again um, it, it will reduce fragmentation across the European Union. I, yeah, I remember a couple of months ago I talked to someone who had tried to establish a standard SAFE template for the European Union countries and said is it just not possible because of the different legal systems?

Speaker B: Uh we actually have the interview with eu uh, funded project that is developing exactly that. Um, you can go back to January I do believe we publish it. There we go. We link it down here in the show notes. Um, I was wondering what is the actual category mistake Europe has made for years? Is it to underestimate the legal friction, overestimate subsidy logic or misunderstanding what investors need to build trust?

Speaker C: Um, I would say um, this EU Inc. Thing is a very good example where politics respond rather fast to suggestions or initiatives because I mean it's not like having been uh, um, requested by the startup community in the European Union for many years. It was, it was just no one was talking about it. And so like I think it was two years ago, um, some people from the startup system, uh, ecosystem, they said wouldn't it be a good idea to have a EU Inc. Company type? And I mean everyone was applauding and uh, suddenly and everyone was saying oh, this is a good idea. Why haven't we discussed this before? And then it was uh, Ursula von der Leyen who said, good idea, we want to bring this forward, we want to do this. And the EU startup commissioner said we want the 28th regime. So it was like someone put a suggestion on the table and everyone was saying, um, not everyone, very many people were saying, oh this is a great idea, let's do it. I think, um, this is a very nice example where politics react rather quickly. I mean, keeping fingers crossed, it's still not in force, so there may be obstacles coming up, but at least the EU commission has adopted this at a very fast uh, uh, speed. From my perspective, if you're talking about, about politics in general, how, how they um, push, how fast they push initiatives.

Speaker B: Mhm. Talk talked about this, um, politics reacting rather fast. Germany on the other side has spent years defending notarial and procedural complexity around the company law. So why do you believe the European route can succeed where we here in Germany struggled with domestic reforms?

Speaker C: I mean honestly, here in Germany we have um, some people and to be frank, we have the notaries which are or uh, will be losing revenue because they don't have the notary appointments because of capital raises anymore in the future. So um, of course it is understandable they will say, ah, uh, let's stick to the notary system because it makes things much more secure and we can prevent fraud and so on. And it is a good thing to read out aloud for several hours the text because we are finding errors and we are helping the young founders who don't have that much experience. Uh, this is the line of argumentation. But on the other hand, again, uh, what we in Germany are doing here is not happening anymore in most countries and we have proof that it's working. And which makes things m. Even more ridiculous. Even in Germany we have company types, uh, like the Aktientesellschaft, um, like

Speaker B: what

Speaker C: is Aksinger in English?

Speaker B: Um, plc.

Speaker C: Yeah, and some others where you can transfer shares without having to go to the notary. And we have to convince in the remaining process, uh, the uh, politicians who are involved and especially those who are in the system in Germany that it will work because it works in other areas and with other company types. But still it is something we have to do.

Speaker B: We totally have to do. Um, I'm personally running unfortunately a little bit out of time. So let's close this with one last question. Nicolaus, on um, the Europe versus US growth polarity. Where do you sit today? Do we need more American style speed hyperscaling and standardization or. Or more European style discipline, but with less legal drag.

Speaker C: Well, you know, I'm a German. I'm a European. No, but I, I think that we need, we need the best of both worlds. I mean there is if, like having the. Using the American speed and optimism and um, and so on is something which you need if you want to build a successful startup. Um, on the other hand, there's some criticism with respect to the Delaware Inc. As well because it's not as transparent and it's not as easy to understand who the shareholders are, for instance, and who owns it. Yeah. So probably it's best to have a good combination of both approaches just doing it. But um, to make sure you've got your bureaucratic aspects covered to a certain extent. Yeah.

Speaker B: Nicolas, thank you very much. We may add that this was recorded on the 13th of April. Uh, we can only talk about what we know so far and I do believe since there will be consultations, there will be implementation into law, there will be long time horizons until this is implemented. I do believe there will be at least one, maybe more conversations about that in the future of startup rate zero. Nicolaus, thank you very much for being here and best of luck with your investments.

Speaker C: Thanks and thanks for having me.

Speaker B: Totally my pleasure. Have a good day. Bye. Bye.

Speaker C: Bye.

Speaker B: That's all folks. Find more news streams, events and interviews@www.startuprad.IO.

Speaker C: remember, sharing is caring. Sam.