Completing the EU Inc Regime: A VC-Gated Startup Sandbox

The idea developed in this contribution originates not from dissatisfaction with the 28th regime as such, but from engaging seriously with one of the most influential critiques of its current design. Academic commentary on the EU Inc proposal—most prominently by Enriques, Nigro and Tröger—has persistently questioned the choice to make the regime available to all European companies, warning that universal scope risks diluting its effectiveness, encouraging political compromise, and ultimately reintroducing fragmentation through Member State discretion. Reflections on venture capital practice, such as Marc Andreessen’s well-known account of how professional venture capitalists select investments, sharpen this concern and suggest an alternative design strategy.

If the central problem of the 28th regime lies in its universal availability, the natural response would be to restrict access to ‘innovative’ or ‘high‑growth’ firms. Yet defining innovation in legislation is widely recognised—including by the Commission itself—as administratively burdensome, conceptually unstable, and prone to boundary disputes. The core question is therefore whether meaningful filtering can be achieved without relying on narrow and contestable statutory definitions.

A more fundamental premise informs our analysis. Europe’s difficulties in scaling venture‑backed firms do not lie, or at least do not lie primarily, in corporate law. Virtually all serious accounts of Europe’s startup and scale‑up deficit converge on a different diagnosis. The binding constraint is the difficulty of closing, downsizing, or restructuring firms quickly and predictably. That difficulty stems above all from labour‑law rigidity and, to a lesser extent, from insolvency and exit frictions. Improvements in incorporation speed, the digitalisation of share transfers, or greater flexibility in capital structures, while valuable, cannot on their own alter the risk calculus of founders or investors if failure remains slow, costly, and uncertain.

At the same time, it is unrealistic to assume that the European Union could induce Member States with deeply entrenched labour‑law traditions—particularly in Southern Europe—to liberalise their systems wholesale or to introduce at‑will employment. Any proposal that presupposes such transformation is politically infeasible. The only viable path lies in an intermediate solution: one that preserves national labour regimes for the general economy, while carving out a narrowly delimited, voluntary, and temporary legal space in which genuinely high‑growth firms can operate under rules comparable to those faced by their North American counterparts.

At this point, three ideas converge. The first is the logic of regulatory sandboxes: experimentation under strict conditions, combined with a built‑in sunset. The second is precisely the suggestion advanced by Enriques et al that the regime should be built from the ground up around the substantive needs of innovative, high‑growth firms, allowing the design itself to do the filtering rather than granting indiscriminate access. The third is the insight drawn from venture capital practice: professional venture capitalists invest only where there is a realistic prospect of multiplying firm value by an order of magnitude, and they do so with their own capital at risk.

Taken together, these elements point toward a simple but powerful institutional solution. The EU Inc should remain a general, optional corporate form but contain an internal Startup Sandbox Module (SSM) available only under two cumulative conditions. First, the sandbox should apply for a maximum period of six years—the typical window in which a startup either consolidates or must close. Second, it should be available only to EU Inc companies in which a recognised venture capital fund participates as the largest or second largest shareholder. In this structure, venture capital funds act as market‑based gatekeepers in the public interest, filtering access to a privileged regime without reliance on an administratively fragile definition of ‘innovative company’. A fund’s willingness to invest significant capital provides an observable and credible signal of growth potential and substantially limits the scope for regulatory arbitrage.

Within this narrow and time‑limited sandbox, the regime must be legally complete in the dimensions that matter most for venture dynamics. Corporate law alone is insufficient. The sandbox must integrate a workable labour‑law framework for covered personnel, an accelerated and predictable exit and winding‑up track, minimal but decisive tax rules, and a contractual safe harbour capable of neutralising the ‘local prohibitive culture’ often encountered in Member State interpretations of venture instruments.

In the labour dimension, such a framework need not be invented from scratch. Existing Member State practice already provides politically feasible templates. A salient example is the Spanish special employment relationship for senior management, explicitly grounded in mutual trust and party autonomy, under which general labour law applies only if the parties expressly choose it, with residual gaps filled by civil or commercial law. Applied on an opt‑in basis to defined categories of personnel within EU Inc startups, such a regime would allow firms to hire, compensate, and, where necessary, terminate key employees under conditions compatible with high‑risk growth strategies, without generalising at‑will employment across the labour market.

In tax matters, legal completeness does not require harmonisation of tax bases. It would suffice to allow a deferral of corporate tax filing obligations during the sandbox period and—consistently with the current proposal—to ensure that employee equity, particularly stock options, is taxed at disposal rather than at grant or exercise. This avoids undermining the equity‑based incentive channel that is central to startup finance.

With respect to insolvency and exit, the existing proposal already moves in the right direction. Little more is needed than to make the sandbox status itself the trigger for simplified and accelerated winding‑up procedures, thereby avoiding the reintroduction of vague and contestable definitional categories such as the ‘innovative startup’.

Finally, on the corporate‑law side, the Regulation should include an explicit clause stating that none of its provisions may be interpreted as prohibiting or impeding shareholder agreements and financing arrangements routinely used in venture‑backed firms. Such a safe harbour is essential to prevent national doctrinal constructions from neutralising, in practice, what EU law formally permits.

Viewed in this way, the Startup Sandbox Module does not contradict the critique of universal scope advanced by Enriques et al; it operationalises it. Access is not indiscriminate. Filtering is real, but delegated to market actors whose incentives are aligned with growth and whose errors are privately costly. The regime is liberal, but only temporarily and only for a screened subset of firms. In this way, the EU Inc can move beyond being a purely corporate‑law innovation and become a genuine experiment in aligning Europe’s legal framework with the economic reality of high‑growth entrepreneurship—without demanding what is politically impossible and without abandoning the internal‑market logic on which the 28th regime is built.

Jesús Alfaro Águila-Real is a Professor of Commercial Law at Universidad Autónoma de Madrid.