Eu/Acc Economic Zones
Let's Make the EU Lovable for Business Too.
Doing business in the EU is challenging, but living here is absolutely awesome.
Is there a way to make business fantastic too and reverse the dominant narrative?
I am joining the open thread by @levelsio on the EU/ACC movement: "Innovate, don't regulate."
If you want to read this article as a thread for a quick overview, check out my Twitter/X profile here.
I will bring a couple of ideas and a personal perspective and proposal.
First, Let's Clear the Scene of Some False Myths
US Growth is Higher than European Growth: True, But with a Caveat
The US is growing; Europe is not. This is the dominant narrative, and it's true. In terms of absolute GDP growth, the US is indeed growing, while the EU is receding.
Take a look at this chart:
The GDP of the EU27, as a percentage of the world GDP, is becoming increasingly narrower.
However, if we adjust the estimate according to purchasing power parity, the picture looks quite different.
Both the US and EU economies appear to be declining in terms of their shares of world GDP compared to China.
It would be very interesting to explore this distinction further to better understand the sources. Source.
Europeans Work Less Than Americans - Definitely False
Yes, you read it right. Apparently, Italians excel at balancing time for an Aperol Spritz with work.
According to this data, Portuguese, Cypriots, Maltese, Italians, and Greeks all work more than Americans.
The difference may lie in the power of narratives.
The narrative on Twitter portrays Europeans as constantly vacationing for blocks of 4-6 weeks, enjoying the sweet, old good life. It's (in)famous for the typical auto-reply email stating, "I will return on the first of September."
In Europe, it is very often true that "the office is closed." However, let's not generalize. Most people, whether in Italy, Spain, or elsewhere, do not take more than two weeks in August.
I don't think it's possible to generalize in either direction, of course:
Are US Working Hours More Productive?
You might think, "In the US, we produce more in less time," especially after considering efficiency. However, this isn't always the case, particularly when compared to Germany.
Germany, the EU’s largest economy, records the lowest number of working hours per person employed in the EU, largely due to widespread part-time work.
When comparing GDP per employee per hour worked at purchasing power standards, Germany's GDP per hour worked in 2021 was actually higher than that of the US.
In 2022, a German employee produced 20 percent less than a US employee overall. However, in terms of output per hour, a German working hour was 1 percent more productive than a US working hour.
Now, let's address the hard truths.
Many of the clichés about the EU startup ecosystem are true.
When you move to the US/SF or similar places after years in the EU, you quickly realize the challenges of the European system.
After you grow your businesses and develop new networks, you may forget how hard it still is for people in Europe.
These insights come from stories and personal experiences shared by close friends over the years.
Before goin deeper into these topics, here are a few preliminary notes. I have lived in India, spent months in China, and four years in Dubai.
This discussion is not about demanding the creation of the next Silicon Valley or YCombinator in every European capital. It's about ensuring the basics are in place so that leaving Europe is not absolutely necessary.
I'll provide just four examples of real events, cutting it short.
These examples are on the extreme side of the spectrum; for sure Europe does have top-class operators too.
“Why am I focusing on the negative sides?” For a balanced outline of the issue.
Mindset
Mindset of American Operators: "Amazing. Send me the SAFE docs and tell me where to wire the money. I am helping by bringing in customers." Done.
(certain) European Operators: "Let's examine the business plan. I am not comfortable with SAFE agreements; I prefer to evaluate the company now. With a discounted cash flow or Berkus methodology, perhaps a $1M pre-money valuation for my $25K investment could be acceptable. Additionally, I would consider 1-2% as an advisor. I will discuss this with my partners at the Board of Directors meeting in 15 days and let you know."
The EU Accelerator Selling Side Services
I think we have all seen schemes promoted by EU accelerators like this—I don't know if they are still around, but they typically looked like this:
The startup sells 12% of the company in exchange for an investment of EUR 70,000 (or a similar amount). Half of these funds are then repaid for coworking space, advisory services, lawyers, and more. The startup cannot refuse or choose different providers.
In the end, you have sold 12% or more of your company on day one, for a net of EUR 35,000.
The Startup Consultant Asking for a Fee on the Raise
I met a consultant almost fifteen years ago who asked for 30% of the seed funding as a fee. I have no idea if he is still around; I've never heard from him again.
The business-plan first "operators"
Some european VCs ask for business plan in pre-seed.
On the other hand, iconically:
As said, these are bad examples. There are also amazing, positive, virtuous examples. The difference with the US is possibly that these bad examples wouldn't last long. The system would naturally tend to expel clearly bad practices at the speed of a tweet.
Living in Europe is Stunning
Enjoying a beer in Caparica, a fondue in Paris, or a gricia in Rome are priceless experiences.
I believe that living in Europe and working remotely is possibly the best combination for many today.
The quality of life, safety in places like Lisbon or Porto, healthcare, and cost of living make Europe a great place overall.
I will mention just one piece of data. This week, I had to book two doctor's appointments. I scheduled them from Friday to Monday here in Lisbon, at a cost of 35 euros for each consultation. The rest is covered by my insurance, which costs roughly 50 euros per month. Usually, it takes a month or more to schedule an appointment. 52 in Boston, as per the book I am currently reading (Lifespan: Why We Age―and Why We Don't Have To).
I found it curious that there was immediate consensus in the opening thread of the movement EU/ACC.
We may dislike certain aspects of the EU, but I think we all fundamentally love it, deeply.
Eu/Acc. Innovate, don't regulate.
This is the spirit of the new movement, Eu/Acc: making the EU lovable for business too, and perhaps a bit bold again.
I am joining the conversation by bringing in my perspective in terms of actionable points.
Credits: @nolive
We Need an EU Inc. Standard Model, Definitely
Yes, there is already a European Company, but its use case differs. It is not designed for startups or simplicity. I recently spoke with a friend, a lawyer specializing in startups with over 15 years of experience, who had never seen it applied in practice. Personally, I didn’t know it even existed.
In the US, the default model for startups is a Delaware Inc., and the preferred early-stage investment model is the SAFE model.
"Y Combinator introduced the safe (simple agreement for future equity) in late 2013, and since then, it has been used by almost all YC startups and countless non-YC startups as the main instrument for early-stage fundraising."
Why do we need a Eu Inc. as soon as possible?
To say that along with Andreas Klinger:
"To invest in the EU I need to understand 30+ legal systems to make sure I am not tricked over by the small print, get lawyers and figure out if i need a notary. After that i need 10-20 emails each funding round to satisfy whatever random fun fact local countries came up now.
In the US I receive an email with a document signing link to a standard SAFE and can sign with one click. I don’t need to check the fine-print. I (and the founder) don’t need to involve lawyers."
Take this, add a standard model for an ESOP (Employee Stock Option Plan) and related taxation regime, and you have it: a minimum set for making early-stage startup life lovable again.
From there, step by step, other elements can be introduced.
We also need Eu/Acc Economic Zones
Delaware is known for its low taxes, efficient courts, and swift administrative processes.
Remarkably, Delaware also offers efficient online support, providing a user experience comparable to private companies or startups.
For instance, I once resolved a franchise tax issue in just ten minutes through their online chat service.
However, crafting a legal framework is only one aspect of ensuring effectiveness.
Often, the real test of efficiency is not the laws themselves but how they are implemented by administrations and enforced by courts. Different applications of the same laws can lead to vastly different experiences.
The challenge in the European Union (EU) is its diversity, comprising 27 member states, each with its own administrative, jurisdictional, and taxation systems. Even with standardized laws, this leads to complexities similar to a three-body problem, but multiplied by 27.
Improving such a complex system like the EU's can sometimes be more difficult than building a new one. Attempts to streamline the system can end up merely layering simplicity over existing complexity. For instance, despite pro-startup regulations being introduced, there are often inefficiencies, as demonstrated by some countries.
Since 2012, Italy has had an innovative startup regime. One criterion for qualifying a registered company as "innovative" is having registered proprietary software. Many companies submit a CD-ROM containing "software" to the relevant authority. It is uncertain whether a real estate company might submit an album by Britney Spears instead. I was chatting with a Chinese investor recently, who remarked, "Everyone in Italy is an innovative startup, especially real estate companies."
"But, Ale, you can't take a bad example; there are other applications that work." Yes, but out of 27 countries, only a few may be capable of executing properly.
A Possible Model for EU/ACC Economic Zones
Imagine a Delaware with a set duration, say 25 years.
It would test and put in place a new, simple legal and economic framework built from scratch. It could draw inspiration from the EU Member State Estonia or Singapore.
This framework could include three key pillars:
- Efficient specialized courts
- Clear administration rules and efficient procedural rules
- Low Tax and and reliable official interpretation of tax matters
This EU/ACC zone could be virtual, and taxes could be rebated to the state where the founders are located. Or, there could be an EU/ACC zone in each country.
The zones could also act as "sandboxes" for testing tech related rules. This would happen before using them on a larger scale. The example of the Digital Securities Sandbox in the UK could be relevant here.
These zones could be a powerful tool for the legislative system of the European Union.
The goal could be to offer a startup-friendly environment. It would provide frameworks that have worked elsewhere and efficient administration.
This is how a EU high-performance startup operating framework could work:
Low taxes:
12.5% flat tax or something similar (Cyprus as a reference).
Tax exemptions for the first 24 months. Similar to Singapore's policy on initial revenues or Estonia's.
Clear social security regime applicable depending on the employee's country of residence.
Simplified ESOP legal and fiscal regime
Exemption from Control Foreign Policy among all European countries:
Founders in every EU country will be taxed in the SEZ, end of story.
Open source everything
Let every builder to build on top of it
Uncertainty minimization policy
For example, an official interpretation service of tax rules with binding responses within 45 days from online request.
I could continue this list, but I believe the direction is clear.
You all are visualizing the product, right?
Do you like it?
"Ah, but it's too complex." Well, how complex is it to implement an EU Inc. standard (with all the consequences) in each of the 27 jurisdictional frameworks? How will this work with the different frameworks based on the increase in share capital, made by public notaries? Does it still require a notary, and if so, in which phase?
"Ah, it will never pass." Well, let's not forget that the UK is showing every day how to do things differently, and nobody in Europe likes to be considered left behind".
Thanks for reading Passepartout by Alessandro Palombo! Subscribe for free to receive new weekly posts.
