Joe was joined on the show by serial investor Andreas Klinger who led this proposal and began by asking him whether it was indeed messy to start a business in the EU these days.

https://www.newstalk.com/podcasts/breakfast-business/how-difficult-is-it-starting-a-business-in-the-eu-these-days

TRANSCRIPT

JOE LYNAM (00:00):

Europe has continuously lagged the US in terms of startups and capital investment in new companies. Much of that is down to the perception of red tape that exists when operating across 27 member states. There's a new proposal, which aims to get over this by creating an EU wide recognised legal entity called an EU Inc. Much like company set up in Delaware and operate all over the United States. And it's hoped that it will make it easier to get venture capital for European startups. I spoke to the technology entrepreneur and serial startup investor, Andreas Klinger, who led this proposal and began by asking him whether it was indeed messy to start a business in the EU These days.

ANDREAS (00:41):

The main difference in the US is you go to a website, you click a few buttons, you have a new company, you send an investor a link, and it doesn't matter where in the continent the investor is based and they will open a link and are able to invest instantly. So I don't have to figure out all the legal complexities. I don't have to figure out all these little things that you have to do in Europe. But the problem we have in Europe is not that it's like legal complexities, it's that every country has their own legal complexities. So investors from one country do not want to touch the legal system of other countries in the worry that something might be wrong and that bites you back five years later, right? The same is with taxation, all these kinds of aspects. There's all these little gotchas that lead to a very simple fact that less than 18% of all early stage investing is actually pan-European or different. Put, unless you have local investors, you most likely are not going to raise very effectively, and even if you have local investors, very likely those are not going to be the best people for your industry in the world because they just happen to be local people.

JOE (01:46):

Isn't the problem. Also, Andreas, that European citizens don't tend to take risks and invest in startups, whereas Americans are more risk friendly. They will throw thousands of dollars, if not millions of dollars into brand new startups

ANDREAS (02:03):

Maybe. But I think it's an outcome of the system. Like if it's less likely that your company is going to quickly fundraise, quickly, hire quickly, raise more money, or quickly get customers and quickly accelerate, it's very likely that your company is not going to be big. So that kind of investment is less of a good opportunity for an investor. This makes any sense. It's less good opportunity for yourself. So automatically people are navigating towards the less risky ideas. You know what I mean? Because it's just more like you basically optimise probability of success versus maximising that success, and that's just an outcome of the system. This is not because Europeans have some of the biggest, most ambitious ideas. We have so much ambition here that we are actually exporting it to the states and creative some of the biggest companies in the states. And that's not because there's some magic difference between Europeans or Americans or Chinese or Indian. The main difference is the system. The system is just fragmented here and makes it hard to accelerate quickly. Well,

JOE (03:08):

Talk me through what you're proposing with your EU

ANDREAS (03:11):

Inc suggestion. Less than 18% of all early stage investing in Europe is actually pan-European, which basically means it's very likely that anybody outside of your country is actually investing in your startups. So either all of your citizens get very rich and start investing in startups or you get more money into your country. So what we are trying to propose is a new legal entity across Europe that's still local. So it's still an Irish company, but corporate law in that entity has been standardised on European level, and they call it the 28th regime in Brussels. So basically there's a corporate law that this kind of entity can optionally pick for this specific use case. And by the fact that this corporate law is now standardised across Europe, you can do standard incorporation, standard documents, standard legal procedures, use the same lawyers, use the same everything. The advantage of that is confidence in all the parties involved.

(04:07):

And out of confidence comes momentum. Out of momentum comes acceleration, speed, taxes, employment in our proposal would still stay in island. This is still an Irish company. If they hire people in island, these people are still under Irish employment law. If they make revenue, that revenue is still Irish revenue taxed in island. The goal here is to make it easier to invest in those kind of companies by creating a standard that enough people understand and do. And to give this quick context, I also invest and I invest globally. For me, it's currently easier to invest in Brazil or in India because those actually end up using American Deliver Inc. Corporate entities. So they use the American standard. Many companies, many startups in Europe do the same because they know it's the only way to actually get international or pan-European investors. So founders already know this is a problem and they're trying to work around the American entities. The solution that we are trying to do is just create a European entities so that the taxes and the authority actually is in Europe.

JOE (05:09):

Will it need any treaty change to enact this or is this something that the commission with the agreement with the council can get done relatively easy?

ANDREAS (05:17):

So first of all, we are making a proposal and it's up to the commission to decide what they actually want to implement. And we are trying to work with the best legal teams in Europe, the best VCs and the best founders in Europe to make that happen. So we think it's a good compromise, and what we hope is by the fact that the employment and taxation actually stays on member state level, that there is less pushback from the member states because the main goal is to get more money into your country. That's the main goal of this whole thing. The main goal here is get more money in and build bigger companies. There is very few things that you actually need to standardise on the European level. It's mainly that there needs to be a new European entity and that European entity needs to adhere to that standardised corporate law.

(05:58):

That's one aspect that obviously countries have to accept or agree to. And the second one is one big problem we also have in Europe. It's not just incorporating and getting investment, it's also like other steps afterwards. For example, incentivizing employees through stock options. So a lot of founders early stage don't have the money to compete with the Googles of the world and salary. So what they do is they give equity in the startup itself to incentivize and let people participate in the outcome. The problem here is there's absolutely no standard in Europe how to make this happen. And to do this across Europe is close to impossible, and in many cases can even create tax liabilities for the employees that might bankrupt them, oddly enough. So what we are trying to do is we also try, because it's already like this platform of corporate law to introduce and standardisation for tax options for equity in startups, so that those kind of stock options can and afterwards be treated as the same way in Europe when it comes to taxation, the individual rates and incentives will be still up to the member states, obviously, but it should only be, for example, taxed at this situation of an exit and not before.

JOE LYNAM (07:05):

And that's Andreas Klinger, the startup investor behind EU Inc. Which has been decided upon by the Justice Commissioner Michael McGraw back in the moment with all the markets.