Larry would act as the investor, and anyone inside the company could come ask for money to found a new "company" or for additional funding. Every company would start out with some kind of "shares" to be distributed by the founders (with vesting, etc). If a company fails the people would actually lose their jobs. If they succeed the equity would be worth some proportionally huge amount.
I don't think any company has ever tried to truly simulate startups on a scale like this while maintaining the upside and downside of a real startup.
It's just crazy enough to work and he's just crazy enough to try it.