Simon Schaefer (EU Inc.): What could make or break the EU Inc.
With Simon Schaefer, a co-founder of EU Inc. petition
The second episode of EU TECH LOOP Radio features Simon Schaefer, co-founder of the EU Inc. petition and the CEO of Factory. Here we discuss the current state of EU Inc. proposals, which deviations from the original plan European founders are dissatisfied with, and address criticisms from (some) EU member states and labor unions.
Hi Simon. Thank you for joining us today.
Hi, Egle. Thank you for having me.
Now let's bring a bit of transparency here. What's your role within the EU Inc. community?
Yeah, happy to. We started EU Inc. some two years ago—Andreas, Vojtech, Philipp, and myself. We've grown a little bit since. We're a team of almost eight now. But we are unfunded and we are not any type of company or anything. We're a group of passionate Europeans who all work in some form, way, or another in technology. And we've set this goal to make the impossible possible and hopefully create a new company framework for Europe.
For those of our listeners who are not too familiar with the subject, what's the 28th regime EU Inc. about? What was the initial idea?
Yeah, sure. Maybe explaining where it came from or what the initial intention was there. When looking at the countries that are not as developed in terms of their technology ecosystem—countries that are at a significant disadvantage even inside Europe, not even looking at them moving to Delaware or anywhere else abroad, but even inside Europe—it's sometimes very hard when you're from a smaller member state to raise capital, to raise awareness, and to gain momentum. And the obvious challenge that we have there is, if you are accustomed to investing in Germany or France or the UK, having to understand the legal framework of every member state is an inefficiency of our current status quo in the European Union.
So we thought, what if we had—similar to Delaware in the United States—what if we had one standard for all of Europe, so that all member states shared the same risks and opportunities when it comes to startup investment? And the same is of course true for the founder, on the other side of the table, when raising capital or governing or maintaining or working with their companies, right? And even all the way down to taxes and any reports you need to submit to the government.
Now, the 28th regime is an old term used in the European Union for quite some time. And it was the idea of a virtual member state, so to speak, in which legislation can be made available and member states choose to opt in to this legislation.
After we went through collecting traction and gaining momentum from the community, a lot of people signed up for our initial petition. We went through the effort of creating a legal framework with law offices from across Europe and the US in order to make sure it's a tangible solution and not just an idea on a white paper. And then the Commission made a proposal this year in March.
And it's not a 28th regime; it still relies on 27 member states, as in, for example, dispute resolution when it comes to the courts. But it enables a free choice of seat, so anyone in Europe can choose to incorporate anywhere else in Europe, which is precisely what Delaware is. You can sit in Massachusetts, but your company is in Delaware, and that enables the community and the member states to build the best possible system for startups, which is ultimately the same goal.
It's not quite as European in its current form as it was proposed. It's not a proper pan-European solution as one standard, but it is standardizing or harmonizing as much as possible within the legislative frameworks at your disposal.
Sometimes we hear a bit of a cynical approach from smaller EU member states or less bureaucratic member states saying, "Why do we need EU Inc.? We have a pretty good regime back at home." Our companies—including in Lithuania, including in Estonia—often scale within the US, and once they have enough money, they come back to Europe and deal with all the bureaucracy here. So what's your answer to that? Why should all Europeans care about this?
So initially that sentiment is not wrong; the only problem there is that they go somewhere else to scale. That to us makes no sense. Europe has an internal market of 450 million people. I think if we look at geostrategy and geopolitics, we are in a place where our old contracts are not as stable as they once were, so for us to build a European perspective on technology is an approach very much worthwhile.
Bearing in mind we have failed to do so for every significant past step in innovation: the internet in the beginning, web 2.0, and everything in frontier AI we're seeing right now, Europeans are barely playing a role. And you know, if times become more challenging, that also becomes an issue. We go as far as saying our sovereignty, our social cohesion, and the survival of our democracies to a degree depend on our sovereignty—not independence, but at least the ability to meet other incumbents at eye level.
So, you know, being able to scale inside Europe without hurdles is really a low-hanging fruit. And if you look at Delaware, it's really interesting to think that even that framework is from before the internet. So not only should we have a standard that's comparable, but why aren't we innovating this and doing even better than Delaware is? Why are we not having something that's so purely well developed for startups that our startups have an unfair advantage in the global economy?
And you know, as an entrepreneur, the glass is always half full, and we're now trying to find the compromise that the European Union is built on in order to make that a reality, and I think that's where it touches all Europeans. It is not just about creating hyperscalers; it's about having our economy use the full potential of Europe, and this is in the interest of every single one of us.
Let's talk about the hurdles. Today is Thursday, October 15th, and the EU Inc. pages shared disappointment in the way the negotiations are currently going.
So I think the saying "the devil's in the details" is never truer than here. When we look at the tools required in order to make EU Inc. work, we have defined five non-negotiables. And this is—you know, it's very polemic, the way that we stated it, probably too polemic.
But these five—and I'm giving you three quick examples: the free choice of where to register the company, an employee stock option program, and a central registry, meaning a central interface for EU Inc. to administer, to found, and to manage the companies.
These three plus the other two—the five in total—are the ones that need to be in there for it to be adopted by the community.
And I think the real challenge we're facing is not a lack of willingness or a lack of ambition, but really a lack of understanding of the innovation economy and startups. Because, of course, over the last decades, everyone that has been working with the European Commission has been trying to protect national member state sovereignty, taxation, and labor law—all these complex parameters—and not give up too much to the European Union, because it was a peace project, it was built on compromise, and it's slow in its behavior. And it's like, "If it works, why touch it, and why not look at it on a national level first?"
That does not make sense. It just does not make sense when you're trying to create a digital market or a single market—forget digital, one single market. And the challenge here is we have the highest level of support, I think, that we could ever find for any of these files. We have prime ministers in the Council asking for the single market to be created by the Commission before the end of the year. We have Ursula von der Leyen, of course, and Commissioner McGrath and Commissioner Zakharieva. They are all extremely in favor of this because, obviously, this is an institutional solution for a problem that is the outcome of any one of their policies.
So we have the highest level of ambition; we have the highest level of support. But then it goes into where these files are being negotiated—the Parliament, the meetings of the ambassadors to the European Union, the so-called permanent representations—and the majority of the people working on these files have been defending their fiefdoms, their own little worlds, for so many years, if not decades. And that's where we're losing the teeth, that's where we're losing the ambition, that's where a free choice of seat is debated away because it raises the concern that the meatpacking industry could avoid local legislative environments.
It is all not really optimized for the initial goal, which is to be better than Delaware or equal to Delaware, and mainly focused on startups and fast-growing companies that want the European market as one. And that's a lack of knowledge; it's a lack of leadership, political leadership, because it's probably not the startup economy's job to lobby with prime ministers to actually get this right. But we take on the challenge as entrepreneurs; we see the issue and we're being as loud about it as we can.
Are the notary requirements still in? Most people in Central Eastern Europe, for example, cannot imagine what kind of Dante's hell steps you have to take in Germany, for example. Is the notary requirement still in, and what are the other very specific points of criticism from your side?
Yeah, so I mean, you need to look at when and where notaries are relevant. And I think there is a role for notaries to play in the identification of the individual they're dealing with, certain background checks, and making sure to have checks and balances on fraud. So I think notaries need to define their own roles. Being a monopoly in Germany—where every document that you sign needs to be read out loud so that the notary actually has to read the document to you, which can take forever, as you just mentioned—let me say, there's innovation potential in the process.
These are not the really big ones, though. I'll give you one concrete example that is really challenging for us: employee stock options. Employee stock options always sound like this "nice-to-have" thing, but in reality, it goes to the core of what startups are doing. First, you have employee stock options to retain talent that can be very expensive. The best people in the world often go where they have the highest salary. For a company with less funding, the only way to compensate for that is to award stock in the company—employee stock options.
Another really important outcome is what is famously known in Silicon Valley as the "PayPal Mafia." These were former shareholders of PayPal that had enough money and funds from those initial exits to eBay in order to be able to found the next generation of companies or invest in other companies. So it's part of the flywheel that makes it all work.
Now, the member states that are positioning themselves against the employee stock option as suggested by the Commission in the proposal are not against stock options in general. They are against this specific regulation based on this specific legal article to regulate taxes because they are afraid they would open a loophole for further regulations by the European Commission to also further interfere with their own tax rules. So it's really a technicality.
And you know, for me as an entrepreneur, it's just like, "Oh my God, how?" If that sentiment is successful or if this is taken out of the regulation, what does that mean? Either the Commission pulls back the proposal and rewrites it over another three years, or it is removed from the legislation, but the regulation passes, and there needs to be a new one designed for stock options. And if you are focused on the outcome and not the procedure, then that's not a really viable process. One possible way forward would be to create an exception just for this one regulation in order to not stall the process. I think the urgency and the drama inherent in this innovation crisis are not fully understood by the upper echelons where this is being negotiated. We don't need this in five years; we need this as fast as freaking possible.
I think the point on free choice of registration and a single digital registry opens up much wider and bigger problems that we have in the EU—a completely fragmented picture or map of how registers work. In Lithuania, for example, everything is super digitized. You have a personal code; everything is connected.
Let me say one more thing about that, because this is one of my key points. Two things, actually. First, the registries are changing their shape. Where we came from, they used to be just, "Okay, this company exists, it has an address, and this is its tax identification number." In the future, it should have ultimate beneficial ownership checks and KYC checks. It should give you a cap table. It should be able to do simulations on the cap table depending on how much credit you take, et cetera, et cetera.
And secondly, for the customer—for the startup or the venture capitalist—having to log into 27 systems instead of one is just ridiculous if the goal is creating one market. Of course we need to log into one product. So ultimately, this digital registry is the translation of a regulation, a policy, or legislation—whatever you want to call it—into a tangible product for the end customer. And that's what I'm really lacking: the customer foresight. What do the people need who are actually going to use it? Because then this question of whether we should have a central registry simply does not survive.
Regarding the point of the scope that the EU Inc. regime would apply to: What kind of companies is this relevant for? Previously, we saw a lot of discussions on what an innovative company should entail and what criteria companies should meet so that they can use EU Inc. We saw a lot of naysayers saying that it should only be spin-offs from universities and companies super heavily involved with the European Innovation Council, Horizon Europe, etc. But that's what the tech sector is about. So what's the status quo on this?
So currently it is not. But if you look at how something like this develops over time, you have the Commission making a proposal, you have the Parliament and the Council finding an opinion, and then they all meet in the trilogues to define a final file, right? That's still to happen. And at that point in time, anything can change. So it's almost behind closed doors; nobody really knows what goes in and what comes out.
Now, I think we need to look at this constraint—innovative or not innovative—again through the lens of: Are we adding bureaucracy and complexity, or are we taking complexity away? That's the first point. So if it's a non-binary decision, like "a little bit of innovation, but not enough," then it's debatable, and then it simply does not work, because you need administrative instances, conflict resolution, etc.
Finding a binary definition is really hard. Otherwise, we would probably also want to suggest one, because then we wouldn't have to deal with the complexities of making this applicable to the entire economy. But most importantly, nobody knows where innovation is heading.
If we exclude the meat industry as an example, who knows what meat-replacing product will be produced in the future that could solve our meat supply chain? Or if you look at agriculture and automation in agriculture—robotics that could start existing in certain verticals that are then excluded by definition.
So I think trying to anticipate where innovation is heading and providing a constraint on the basis of this is flawed, because neither Brussels, nor venture capital, nor startup founders can do that. That's looking into a crystal ball that we simply don't have.
And the constraints created are based on fears of abuse. So let's tackle abuse. We're not against tackling abuse; abuse is not our optimization potential. Our optimization potential is the first trillion-euro company to exist in Europe. And that's why I think working against the constraints that are the real problem—meaning abuse—needs different tools than trying to anticipate innovation, where everyone else in the industry says you can't.
Is the free choice of registration being called residency—I don't remember the exact name—shopping? Is that the term that the critics are using?
Yes, "forum shopping" is what it's called. Yeah, so a race to the bottom, trying to find the best environment and the member states competing for that environment to be created.
Though being kind of an anti-European principle, it's the only thing that's possible in the current construct. So the reach of the Commission and the Union doesn't go deep enough unless you go through unanimity, which means every member state has to consent to it and agree to it.
It's not deep enough to really create these rules that are universally applicable. There is variation, and there is local adaptation necessary.
Which, of course—that's what Europe was built on; we're not saying that it shouldn't have that. What we are saying, though, is the direct example to compete against is and remains Delaware. And Delaware is not great, right? Delaware is simply the most applicable standard through a high volume of use. So many people have used it so successfully that it has become the de facto standard. But that doesn't mean that, A, it can't be done better, and B, if it's also from before the internet, there's not significant innovation potential in this entire framework.
So that's why, for us, saying free choice of registered seat is what enables the same principle as Delaware for the Union as it is for the United States. That means we leave the innovation potential on the table because individual member states can do better than others. And you can call it a race to the bottom, you can call it forum shopping, but we call it the only surviving principle if you do not create one single standard for all of Europe that everyone has to unanimously subscribe to.
It's a bit of a double standard, if you will, because federalists in Europe—including Mario Draghi—are talking about the need for the EU to become a "pragmatic federation." Lots of companies are lobbying for increasing European competitiveness, but for whom? And we're at least theoretically working towards a single market. What's stopping us here?
Towards more federalization?
Towards common standards.
I think in reality it's a definition of where Europe comes from and where it needs to be heading to. So we're coming from the result of a Second World War, in which we desperately needed to grow together, and it's a peace project that formed alliances in order to make sure it never again comes to the situation it was in the decade before. I believe that's not a complete summary, but it's an outcome of the previous phase of the European Union. And you know, to our benefit, I grew up in peace, and I'm very grateful for that—and I could not imagine, as you are, being so close to a war. It's one of my big fears, and I think it's also one of the driving forces behind a potential for more federal thinking, because in the end, the only thing that drives this is an externalized threat. The only time in which we as Europe really acted as one, took on collective debt, and made sure that we have collective rules was during the coronavirus pandemic.
And that's also why, in my book, we're not talking enough about an innovation crisis and a sovereignty or security crisis when it comes to technology, because that would give us different tools to act together. Instead, Europe is still European; it's still doing what it's used to. It's slowly meandering through the implementation of a file. And here we are, where everyone in the European Union tells us no one has ever processed a file as quickly as EU Inc.—if it succeeds at closing or being done by the end of the year, which we highly doubt given the status it's in.
That already means, again, over three years for its final implementation. So I think the real challenge is that we're not scared enough as Europe, or not afraid enough of the future without it, so that we actually act for it.
You've mentioned that the involvement of the EU Commission was quite good—exemplary, if you will. What about the governments, the PermReps? I'm sure you're trying to reach out to them through individual members. Have they ever contacted you guys?
Yeah, so, one challenge that we surely have is resources, being a small group, and that's also why we work with associations where we have standing relationships, or where these associations have standing relationships with PermReps and members of the Parliament.
We do have a lot of exchange with members of Parliament on specific elements of the file. And beyond the Commission, we do have a standing relationship with the Council. We've just had a meeting last week—I was unfortunately unable to travel—with the Taoiseach [Prime Minister] of Ireland. Several prime ministers have voiced their support. The Greek prime minister met us during Panathenaia when we were there in Athens. There is a very high level of support.
But as you mentioned, the PermReps—I think this is the exact forum. The permanent representatives—maybe not everyone in your audience knows who they are: they are the permanent representatives of the member states in Brussels. They all have an office, they invite people for discussions, and then they have Coreper, which is their forum in which they discuss. And that's where I think the majority of negotiations happen, often to the detriment or negative impact of EU Inc., because it feels like that's how things have been done over the last decades. That's where the fiefdoms are—where member states defend their sovereignty within the European Union. And I think that's where we need to open up and think more about Europe and less about its individual member states.
It's logical: if you're representing a member state, then you have a single mandate, and your mandate is not to grow Europe; your mandate is to protect your country or to advocate in favor of your country. I think that's a systemic challenge. We're more or less entering a phase where using the design of the European Union to find a compromise on such an innovative file as EU Inc. is probably a challenge for the institution itself.
But that said, there are other options, right? We can do it privately, we can find a coalition of the willing, or we can work further with the Commission if it fails to develop a group of member states that get together to implement the file. So there are many other ways to do this. It just all means we're losing time. And for the most part, it's because of a lack of understanding of the innovation economy and protectionism for member states. That's not a good combination, because it leaves a lot to be desired.
PermReps, especially from smaller countries, also face a shortage of resources, including human resources. So if anybody's listening, EU Inc. is available for comments and for sharing knowledge with you.
We've seen some labor unions protesting EU Inc. in Brussels. What do you think about that? Would we ever see a similar protest by European startup founders? This is a little bit sarcastic because you're all busy, but—
To be honest, I wish we would be emotional enough to go to the barricades for it.
Regarding trade unions, the first thing I want to say is that we are actually in agreement with the majority of their demands. We are against the abuse of any tool to the detriment of workers. That's never an outcome we would ever desire. Obviously, we're humans first, right?
Secondly, and most importantly, the innovation economy has different tools for addressing a similar problem. So trade unions and workers' rights protection is a mechanism that stems from the Industrial Age. Of course, that's when children were sent to work for no salaries, right? Obviously required and needed. There, though, is a need to adapt to new realities. In our playbook, it's obviously stock options. We'd rather have employees become owners of the company and protect minority shareholders.
Now, last but not least, abusing a company form has always been and will always be possible. No safeguard that we have in the world today—not the notaries, not the trade unions—has made it possible to 100% prevent fraud in whatever circumstance. So I think instead of being against a file that directly drives GDP and helps Europe compete globally, we should have a discussion about safeguards against abusing a system that is inherently imperfect. And even if EU Inc. is launched as it is, it will not be perfect and will need adaptation over time.
But does that mean we should block the growth or the potential of Europe's founders to create the next big companies and be part of a sovereign discussion around technology? Obviously not.
And again, I know it's a sarcastic question, but in the end, I actually wish we would be there by the tens of thousands in front of the Berlaymont —or demonstrating as founders to say this is so desperately needed. But I'm afraid we don't have the time to do that.
We'll have to doodle that.
Last question. What's your call to action for those who are listening to us today—be it a founder, a person who's interested in tech policy, a person who's in favor of the EU becoming more competitive, or a PermRep representative or a Commission representative?
So in our publication today, we've also posted the work of our legal teams. We did very, very acrobatic deep dives into all of the challenges—our five non-negotiables predominantly—but we also provided red lines for every one of the compromise texts that we've received so far. We have the body of work. If you do not just want to trust our statement and that of those who signed our petition and supported our work—if this is not enough—then dive into those files and argue with us. Because what's easy to do is to say, "I'm not like you; I'm from a different part of the economy than you, and that's why I don't like what you're doing." What's really hard to do is to discuss with me tools against abuse and fraud, but not be in favor of the growth of the European market and founders in Europe.
And that discussion, unfortunately, is not happening. It's either "for" or "against," and that's too polemic; that's exactly what we don't need. We need to be talking about the details, and we are ready. We just need to be heard, and we want to be sitting at the table when these details are discussed—not just to give our opinion, but to convince everyone in the room that this is absolutely necessary and the right way to go.
And make sure to stay educated about the cause because we have a lack of knowledge on the topic. Everywhere I travel to Central Eastern Europe, people are not that involved.
Simon, thank you for joining us today. Great conversation. Godspeed. Follow us at eutechloop.com for fresh insights into the EU's tech, consumer policies and more.
Thank you for having me, Egle.
