EU inc

1. EU inc: Can Europe finally get a truly start-up-friendly company form?

Europe has long had a high level of innovation, but in practice, fragmented national regulation regarding company law and investment barriers have made it difficult for start-ups to scale across EU borders. This is precisely the challenge that EU Inc is trying to solve – with the ambition of creating a single, common, digital and standardised European company form that works as easily and predictably as a Delaware C-Corp in the US.

2. The current problems with cross-border investment in the EU

When European start-ups grow beyond the borders of a single country, they often encounter a number of structural and legal problems:

a)    Fragmented company rules

Each EU country has its own company forms, capital requirements, governance rules and reporting procedures. This means:

• Start-ups must navigate different compliance requirements in each country.
• Legal documents, incorporation processes and investor terms must be adapted to national law.
• Investors may find it difficult to compare risks or governance between countries.

This complexity prolongs and increases the cost of cross-border investments and may ultimately deter international angels and funds from investing in Europe compared to the US or the UK where the national regulations is more commonly known.

b)  Capital raising and incentives

Cross-border investments often require local legal counseling, due diligence and adaptation of term sheets, investments procedures, tax, etc. – which increases both the number of advisors and costs.

For many foreign investors, it is less complicated to invest in a Delaware-incorporated start-up, where the legal framework and investor protection are standardised and known worldwide.

As a result, European start-ups often:

• Spends time and resources on adapting to local markets.
• Spends a larger proportion of any investment on the transaction costs themselves.
• Has a smaller pool of interested investors.
• Is considering establishing itself in Delaware in order to attract capital from international investors.

3. What can we expect from EU Inc?

EU Inc is a proposal for a new European company form – i.e. a set of common rules that companies can voluntarily apply alongside national exissting company forms. The initiative is still under development, but the preliminary messages and concepts contain the following elements in particular:

a) Standardisation and digitisation

• EU Inc aims to become:

  • A common EU-wide company form, under EU law, without replacing national company structures.
  • A fully digital incorporation process – ideally with an EU register where a company can be set up online with a single standardised process.

b)  A practical tool for cross-border start-ups

The aim is for EU Inc to make it:

• less bureaucratic to start and run a business across the EU
• easier for investors to understand governance terms across the EU
• faster to raise capital and bring international investors on board.

In short: EU Inc should function as a pan-European company form that minimises the costs and complexity of cross-border investments and makes Europe more competitive on a global scale.

4. What do we hope it will not be? (SE company)

However, a European company form is not a new idea. Since 2004, it has been possible to establish a single European company, Societas Europaea (SE company).

The SE form is a pan-European company form under EU law, which came into force in 2004.

The target group for the SE company is medium-sized to large companies, typically groups or established companies. An SE company requires, for example, a minimum capital of EUR 120,000, and the incorporation procedures are complex.

The result is that there is only one active SE company in Denmark – and it is in bankruptcy.

5. Potential

Europe has an opportunity to fix some of the structural problems for financing start-ups. If EU Inc. delivers on its promise, it could:

• create a common, digital, and standardised company form that makes it way easier to start and scale businesses across the EU.
• reduce legal complexity and investment friction, giving angels, funds and international investors a clearer, more predictable basis on which to operate.
• provide European start-ups with a real alternative to Delaware, without having to move their domicile or set up complicated structures to raise capital.

But the potential depends on the details: governance, investor protection, digitisation, and how EU Inc interacts with national company forms. If successful, it could be a decisive step towards making Europe a much more attractive home for innovation and growth.

If the start-up ecosystem really needs cross-border help in the EU to consolidate the market for start-up financing, we are keeping our fingers crossed that European standards for investments (similar to SAFE notes) and employee incentive programmes (ESOP) will subsequently be created.