2.

Theoretical Framework: Domestic Organisational Cost and the

Transaction Environment Penalty
Legal organisation has an economic dimension before it becomes a legal status. Founders
do not select a corporate form once and then merely operate within it. They acquire, amend
and, at times, migrate the legal architecture through which enterprise becomes investable.
Incorporation, capital issuance, admission of investors, conversion of instruments,
amendment of shareholder rights, governance redesign and preparation for exit are all
organisational events. At each such moment, the legal system either supplies an intelligible
path or leaves the parties to bear compulsory gateways, contestable clauses and risk
absorption. Organisational law therefore has a price. Filing fees and professional invoices
are only part of it. Delay, uncertainty, bargaining friction and the residual legal risk
attached to translating an agreed economic structure into domestic form belong to the
same account.
Venture-backed firms make that price especially visible. A conventional closely held
company may incorporate once, adopt a stable governance structure and operate for years
without major changes to its capital architecture. A high-growth startup moves through a
denser sequence of legally salient events. Financing is staged. Ownership changes
repeatedly. Founders and investors bargain over cash-flow, control and exit rights.
Documents prepared at one round must remain legible to investors who arrive later and
were not party to the initial bargain. Staged finance, syndication and exit orientation
therefore make legal adaptability unusually valuable. A regime tolerable for a static firm
may become costly when applied to an enterprise whose value depends on rapid and
repeated reorganisation.20
Transaction-cost theory supplies the background intuition, but the mechanism at issue
here is narrower. Coase and Williamson explain why parties contract, integrate or devise
governance structures in the presence of frictions. Corporate-law theory explains why legal
personality, limited liability, transferable interests and delegated management make
enterprise organisation possible. Present analysis asks a more specific question: what does
it cost to make legally effective the organisational changes that a venture requires? That
question differs from asking whether a transaction can be negotiated at all. A founder and a
venture capitalist may reach agreement on economics, control, downside protection and
exit. A separate problem arises when domestic law makes the agreed structure costly to
validate, uncertain in legal effect, or difficult for later investors to recognise.21

20
William A Sahlman, ‘The Structure and Governance of Venture-Capital Organizations’
(1990) 27 Journal of Financial Economics 473; Steven N Kaplan and Per Strömberg,
‘Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture
Capital Contracts’ (2003) 70 Review of Economic Studies 281; Josh Lerner and Ramana
Nanda, ‘Venture Capital’s Role in Financing Innovation: What We Know and How Much We
Still Need to Learn’ (2020) 34 Journal of Economic Perspectives 237.
Event-based analysis follows from that distinction. Let r denote a legally relevant
organisational event and j the jurisdiction whose law governs it. Formation, a capital
increase, the issuance or conversion of a financing instrument, the creation of a new class
of rights, a governance amendment, a share transfer, or a restructuring undertaken before
an institutional financing round all qualify. Every such event has a baseline cost, because no
legal system supplies organisation at zero cost. Even efficient systems require
identification, filing, recordation and some form of legal validation. What matters, then, is
whether the domestic path costs more than a functionally equivalent benchmark path.
Domestic organisational cost at event r in jurisdiction j can be expressed as:
D OC j , r=( C0 r + M j ,r + R j , r ) ( 1+ λ j ,r )

Here D OC j , r denotes the cost of completing event r under jurisdiction j. C 0 r is a

normalising floor: the minimum cost of legally credible validation for event r, common to
the comparison and not itself a jurisdiction-specific friction. Its inclusion inside the cost
base means that liability-boundary uncertainty still affects it. Where λ I T ,r exceeds the
benchmark value, even the ordinary validation floor is scaled upward. The excess is
attributed to the uncertainty term, rather than to C 0 as an independent legal friction. M j , r
captures mandatory intermediation: the cost imposed when legal validity is channelled
through a compulsory professional or administrative gatekeeper. R j ,r captures contractual
rigidity: the certainty-equivalent cost of residual uncertainty over the validity and
corporate effect of venture clauses after their translation into domestic corporate
categories. λ j ,r captures liability-boundary uncertainty: the certainty-equivalent premium
that arises when directors, investors or counsel cannot identify with sufficient confidence
the conditions under which liability protection will hold.
Mandatory intermediation deserves separate emphasis because it is not merely a
professional fee. It is a cost of access to legal validity. Where a notarial deed or equivalent
intervention is required, the parties cannot substitute ordinary counsel, direct filing or
digital registration even for standardised transactions. Section 3 treats that cost in greater
detail by disaggregating M j , r into incidence, price, rent component and latency. At this
level, M j , r remains an aggregate term. Its purpose is to identify the compulsory gateway
through which the organisational event must pass.
Contractual rigidity enters differently. Practitioners translate venture economics into
domestic legal categories through quota classes, charter provisions, shareholder
agreements, contractual rights or hybrid instruments. Legal engineering describes that
activity of translation. R captures the residual discount that remains when, after that work
has been done, the validity or corporate effect of the resulting clause remains contestable
under general mandatory standards. A liquidation preference, drag-along clause, anti-

21
RH Coase, ‘The Nature of the Firm’ (1937) 4 Economica 386; Oliver E Williamson, The
Economic Institutions of Capitalism (Free Press 1985); Henry Hansmann and Reinier
Kraakman, ‘The Essential Role of Organizational Law’ (2000) 110 Yale Law Journal 387;
John Armour, Henry Hansmann and Reinier Kraakman, ‘What is Corporate Law?’ in Reinier
Kraakman et al, The Anatomy of Corporate Law (3rd edn, OUP 2017).
dilution mechanism or valuation-deferring instrument may be technically drafted and
commercially accepted, while still carrying uncertainty over whether it will operate with
full legal effect if later tested by a notary, counterparty or court. Recent work on German
and Italian venture contracting points in this direction, showing that the relevant
constraints arise not only from black-letter rules but also from corporate law in action.22
Liability-boundary uncertainty requires a narrower description than generic legal risk.
Italian law does provide limited liability, and ordinary doctrines of management discretion
remain important. Difficulty isolated here is more specific. Article 2086 c.c., read together
with Article 3 of the Codice della crisi, imposes a serious duty to establish adequate
organisational, administrative and accounting structures. Yet the statutory framework does
not furnish an express safe harbour or a sufficiently determinate event-level compliance
methodology for directors of high-growth firms. For a venture whose structure changes
rapidly and whose funded-growth profile may be deliberately loss-making for extended
periods, that incompleteness can raise the cost of governance-sensitive events.23
Comparison with functionally equivalent benchmark paths gives the domestic component
of the Transaction Environment Penalty:

= ∑ [ D OC I T ,r − DO C B (r ) , r )
DO M
TEP
r∈ R

In this expression, B ( r ) denotes the benchmark path for event r. Benchmarking must
remain functional. No single jurisdiction supplies the universal comparator. Estonia and the
United Kingdom are useful when formation, registry design and digital validation are at
issue. Germany is informative when the question is whether compulsory notarial
participation necessarily implies high surplus extraction or delay. Delaware is the relevant
legal benchmark for venture equity architecture, while U.S. venture practice more broadly
matters when the inquiry concerns standard forms, counsel routines and due-diligence
expectations. Relevant comparison therefore attaches to the organisational function in
question, not to an idealised jurisdiction assembled ex post.

22
Luca Enriques, Casimiro A Nigro and Tobias H Tröger, ‘Mandatory Corporate Law as an
Obstacle to Venture Capital Contracting in Europe: Implications for Markets and
Policymaking’ ECGI Law Working Paper No 834/2025; Luca Enriques and Casimiro A
Nigro, ‘No Private Ordering Please, We’re Italian’ (2025) 11 Italian Law Journal 139; Paolo
Giudici, Peter Agstner and Antonio Capizzi, ‘The Corporate Design of Investments in
Startups: A European Experience’ (2022) 23 European Business Organization Law Review
787.
23
Art 2086(2) codice civile; [Link]. 12 January 2019, No 14, Codice della crisi d’impresa e
dell’insolvenza, Art 3. See Enrico Ginevra and Chiara Presciani, ‘Il dovere di istituire assetti
adeguati ex art. 2086 c.c.’ (2019) 5 Le Nuove Leggi Civili Commentate 1209; Marco Cian,
‘Crisi dell’impresa e doveri degli amministratori: i principi riformati e il loro possibile
impatto’ (2019) Le Nuove Leggi Civili Commentate 1160; Maurizio Irrera, Assetti
organizzativi adeguati e governo delle società di capitali (Giuffrè 2005).
Used in this way, T E P D O M is a decomposition device. No single numerical value is assigned
to the domestic penalty. Quantitative materials help to locate scale and plausibility; they do
not identify the separate contribution of M , R and λ with econometric precision. Doctrinal
analysis identifies the legal sources of the frictions. Comparative institutional analysis
shows that alternative legal paths exist. Behavioural evidence, including foreign
incorporation and restructuring around financing events, is used as evidence consistent
with the mechanism. That discipline prevents different kinds of cost from being collapsed
into an undifferentiated complaint about bureaucracy, legal culture or investor preference.
Given this functional form, positive interaction between event-level frictions and liability-
boundary uncertainty follows immediately:
2 2
∂ DO C j ,r ∂ DO C j , r
>0 >0
∂ M j ,r ∂ λ j , r ∂ R j ,r ∂ λ j ,r

If an event already carries compulsory intermediation or a residual validity discount on

venture clauses, liability-boundary uncertainty raises its effective price. M and R remain
additive within the formal specification:
2
∂ D OC j , r
=0
∂ M j ,r ∂ R j ,r

Institutional relation between M and R can still be strong. A capital increase that carries
investor-protective rights may require both notarial intervention and clauses whose
corporate effect remains contestable. Formal additivity only means that the model does not
claim mathematical complementarity between M and R . The interaction established here is
narrower: liability-boundary uncertainty increases the marginal cost of proceeding under
either domestic-cost channel.
Reform implications follow from the same structure. Holding C 0 r constant as a baseline
floor, an increase in λ raises the marginal cost of both mandatory intermediation and
contractual-rigidity cost at the relevant event, while also scaling the ordinary validation
cost of that event. A reform that lowers one domestic cost may therefore yield less than
expected if another domestic cost remains visible and liability uncertainty continues to
scale the remainder upward. Reducing notarial incidence at formation, for example, has
limited effect if later financing events still require compulsory intervention. Giving venture
clauses a validated statutory home reduces R , but helps less if directors remain uncertain
about whether the resulting structure will later be treated as organisationally adequate.
Coordinated reform matters because partial reform can leave the broader cost architecture
substantially intact.
External platform effects enter only at platform-sensitive events. Let N I T , r denote the
certainty-equivalent cost that arises when access to institutional capital depends on
compatibility with a recognised venture-financing platform and the Italian path does not
supply that compatibility at event r. N I T , r is zero for events where platform compatibility is
irrelevant. It becomes material at financing or exit-related events where investors, counsel
and later-stage market participants expect forms, rights and interpretive background that
are already standardised within their working environment. Where that margin is active,
the relevant venture-facing cost of the Italian path is D OC I T ,r + N I T ,r .
Platform effects do not multiply domestic legal costs. Italian notarial fees do not rise
because Delaware exists. The premium captures a different margin: the cost of remaining
outside an ecosystem in which forms, counsel routines, due-diligence expectations and
interpretive assumptions are already standardised for investors. Domestic reform can
lower D OC I T ,r . It does not, by itself, eliminate N I T , r.
Network value should not be reduced to familiarity in a merely psychological sense.
Repeated use of a legal platform produces interpretive capital, standard forms, lawyer-side
routines, investor expectations and approval practices that lower the cost of transacting
within that platform. Klausner’s account of corporate-law networks and Kahan and
Klausner’s analysis of standardisation in corporate contracting supply the theoretical basis.
Bartlett’s published study of Series A charters provides a contemporary empirical anchor.
It documents deep standardisation in U.S. venture financing around a contractual
infrastructure whose compatibility assumptions are Delaware-specific. Among nearly
5,000 Series A startup charters, adoption of the model charter rose from 2 per cent in 2004
to 84 per cent by 2022, while Delaware incorporation in the sample rose from 63 per cent
to 100 per cent.24
Separating N I T , r from T E P D O M sharpens the reform claim. Italian law can lower M by
replacing compulsory professional intervention with registration-based validation for
standard events. It can lower R by giving venture clauses a native and validated statutory
home, so that their validity and corporate effect no longer depend so heavily on contestable
translation into general corporate-law categories. It can lower λ by making the compliance
path around Article 2086 more determinate. Those reforms reduce the cost of organising
through Italian law. They do not, by enactment alone, recreate the accumulated platform
value associated with Delaware, NVCA forms and U.S. venture-counsel practice. Network
value is built through repeated use. Law can make that accumulation possible. It cannot
fully create it immediately by enactment alone.
Behavioural evidence must therefore be used with care. A Delaware Flip may show that
founders and investors value entry into a Delaware-compatible financing environment
highly enough to incur the cost of leaving the domestic path. It does not, by itself, identify
how much of that choice is attributable to mandatory intermediation, how much to residual
uncertainty over venture clauses, how much to liability-boundary uncertainty, and how
much to platform access. The same caution applies to evidence on the Italian venture-

24
Michael Klausner, ‘Corporations, Corporate Law, and Networks of Contracts’ (1995) 81
Virginia Law Review 757; Marcel Kahan and Michael Klausner, ‘Standardization and
Innovation in Corporate Contracting, or the Economics of Boilerplate’ (1997) 83 Virginia
Law Review 713; Robert P Bartlett III, ‘Standardization and Innovation in Venture Capital
Contracting: Evidence from Startup Company Charters’ (2026) 55 Journal of Legal Studies
83. Bartlett documents, among nearly 5,000 Series A startup charters, model-charter
adoption rising from 2 per cent in 2004 to 84 per cent by 2022 and Delaware incorporation
rising from 63 per cent to 100 per cent.
capital market. Bank of Italy analysis presents the Italian VC gap as multi-causal, linking it
to relatively few innovative and marketable ideas, an undersized domestic VC fund
industry and comparatively fewer opportunities for successful exits. Legal organising costs
operate within that wider environment; they do not displace it.25
Domestic TEP has a narrower and more useful role. It names the legally generated excess
cost of organising through Italian law across the venture lifecycle. It is neither a proxy for
Italy’s overall economic underperformance nor an explanation of the whole Italian VC gap.
Its analytical value lies in keeping four often-confused matters distinct: compulsory access
cost, residual uncertainty over venture clauses, liability-boundary uncertainty and external
platform effects. Once separated, each can be defended, criticised and, where appropriate,
reformed on its own terms.

25
Raffaele Gallo, Federico Maria Signoretti, Ilaria Supino, Enrico Sette, Paolo Cantatore and
Marco Luigi Fabbri, The Italian Venture Capital Market, Banca d’Italia, Questioni di
Economia e Finanza No 919, April 2025. The paper groups the Italian VC gap into three
broad factors affecting the startup lifecycle: relatively few innovative and marketable ideas,
an undersized domestic VC fund industry and fewer opportunities for successful exits.