Unintended Consequences: When SAFE and Convertible Notes Go Awry

Andrew Krowne and I recently co-wrote an article in Tech Crunch, Why SAFE Notes Are Not Safe for Entrepreneurs. We’ve received numerous constructive comments, both privately and on social media, from attorneys, VCs, and CEOs who are well aware of the problem (including several who are experiencing it in real time).

This is a fundamental issue that does, indeed, boil down to understanding the post-money valuation of a company. But it is also a topic that many find esoteric and difficult to grasp.

To restate two core points of the article:

While there are proper uses of notes (to bridge the company to achieve a major milestone, or driven by insiders’ willingness to extend runway), there also are troubling and frequent improper uses (to postpone pricing equity until valuation is higher or to ignore the implicit message associated with being unable to find a lead investor to price the round on terms that the founders like).

 At its core, this issue points to the lack of understanding about the importance of post-money valuation by both entrepreneurs and investors. While VC deals remain marketed on a pre-money basis, sophisticated investors know that what matters most is the post-money (how much of the company will I own after all of the new shares have been issued). Unfortunately, what the CEO/founder forgets most often is that the notes have a multiplier effect in the post-money calculation; the more notes and the further the cap is from the new priced equity, the greater the variance between actual and nominal pre- and post-money valuations.

There is nothing wrong with using a SAFE or a convertible note in a startup if you know its implications. However, many VCs experience vexing discussions with CEOs, and many CEOs belatedly realize that this is because they made a mistake: issuing multiple series of notes at various valuation caps without actually sitting down and figuring out the pro forma post-conversion equity ownership.

This is not uncommon—and it is a problem precisely because the notes are being used improperly. The most serious unintended consequence occurs from “note waterfalls”— converting multiple notes that have multiple valuation caps.

Many entrepreneurs lose track of what they have been cooking up in the cap table. They do not recognize that they may have already contractually sold a meaningful portion of equity in their company.

When it comes time to convert the notes, these entrepreneurs face ‘sticker shock’ about their post-financing ownership. That’s only one result of mismanaged expectations dating back to when the notes were issued!

The following scenarios represent typical recipes for trouble:

  • Company X is early in business development, has a near-term need for capital to get through the next 3-6 months, and the management team has no understanding of how the equity should be divided up among its various constituencies (this includes option pools and what ownership stakes investors typically require at various development stages).
  • Company Y receives an offer from an angel or ‘unsophisticated’ smaller VC fund that is unwilling to lead and price the equity but wants to ‘invest now’.   The easiest way to do so is via SAFE notes, due to their simplicity, “available online” documentation, no major covenants established to protect the investors, no governance implications at the board level, etc. All of these items are postponed until the elusive priced equity round. “It’s going to be great!”
  • Issuing notes eases the burden of getting several investors to commit simultaneously and solves the ‘chicken-or-the-egg’ issue by creating a rolling close that financially benefits the earliest movers with more attractive financial terms. In contrast, there is limited benefit for being the 2nd investor or the 10th investor joining the syndicate of a priced round, so it is common for investors to wait to see “who else is involved”.
  • The CEO/founder often has leeway to influence or negotiate the cap value (especially when the headline cap is softened by a discount). This is very common when the company is still in its infancy and the valuation goalposts remain distant. A much larger problem arises when subsequent ‘series’ of notes are issued, especially if each successive series has a higher valuation cap. CEOs and unsophisticated investors very often start anchoring the caps to what they think the company could be worth, all without external validation. In these cases the caps can easily diverge from the true number at which a company could raise sufficient equity to provide at least 18 months of runway with no revenue (a normal VC round).

The bottom line: Startup CEOs/Founders need to do the projected capitalization table math on an as-converted, post-money basis from Day 1, before issuing any notes and modeling various possible future scenarios. It will be worth the time and effort.

Make sure you understand what you are doing now so that you are not negatively surprised in the future. Sound simple? Yes, and it’s a lot simpler than making your startup grow into a successful company. Now go do it.

How to Build a Global Center of Innovation Excellence in Salzburg, Austria

Pascal Levensohn Salzburg

 

 

 

 

 

 

 

 (c) Blowup Salzburg / Fachhochschule Salzburg

I recently joined the Advisory Board to Gerhard Blechinger, the Rector of the FachHochschule Salzburg, (the Salzburg University of Applied Sciences) and became a guest lecturer on Entrepreneurship at the University.  My inaugural keynote lecture focused on the challenges and opportunities for Salzburg to become a global center of innovation excellence.  To succeed in this ambitious initiative, the academic, business, and entrepreneur communities will need to collaborate closely.  In my view this commitment to collaborate is in place. I also believe that the greatest challenge for the region will be overcoming cultural biases that punish risk-taking and are intolerant of failure in the process of building new companies…

Below are selections from my formal remarks:

“… While many countries have accelerated their national research and development investments and funded national venture capital ecosystem development programs, there is still no proxy for the scale that has been achieved in the US, particularly in Silicon Valley itself.

The challenge that many regions face in seeking to become innovation centers of excellence can be summed up in one sentence:

Good ideas are generated from all corners of the earth, but few regions offer a complete and cost-effective ecosystem to develop these good ideas into great companies.

Why is this the case?

Silicon Valley has proven its fertility in giving birth to world changing technologies over many decades; its inspiration to the entire world has grown exponentially over the past 20 years because the Internet has empowered millions of previously unconnected individuals to collaborate, enabling information about anything to be shared globally and discussed in real time through audio and video conferencing on an unprecedented scale and at extremely low cost.

But it is not enough to simply have technology tools and risk capital in hand to build a sustainable innovation ecosystem.

For Salzburg to succeed as an innovation hub, it is essential for local private sector business leaders to make a long-term, active, and visible commitment to be active partners in this process.

How can Fachhochshule Salzburg act to further catalyze and contribute to a complete and cost-effective ecosystem for innovation?

How can the Salzburg community come together to nurture ideas into startups and see these startups grow into globally relevant companies?

How can we transform the Salzburg region’s traditional rural economy into a knowledge based, innovative business community?

First, we need to differentiate between whether Salzburg should prioritize the funding of entrepreneurs who are pursuing breakthrough innovation as opposed to incremental innovation. Pursuing breakthrough innovation can lead an emerging company to global scale more quickly, whereas incremental innovation leaves a resource-constrained startup vulnerable to both entrenched and emerging competition, especially in a regional innovation center.

Many entrepreneurs confuse what may be an exciting idea that is only a feature with a truly innovative concept that can become a standalone company. For example, today, designing a smartphone App that alerts you when you have lost your car keys isn’t a viable standalone company; today, a service-based local software solution to manage ecommerce for brick and mortar companies, even if it is profitable, is not an interesting technology investment.

In contrast, consider a patented, proprietary software platform that verifies whether goods are authentic or counterfeit. When that solution combines low-cost, unique labels that are a fraction of the cost of all other solutions, and uses an App on your smartphone to interact with your customers in a manner that has previously been considered impossible, that is an example of an innovative company. Not only does that company exist, it is Salzburg’s own Authentic Vision—and you will hear more from co-founder Thomas Weiss later this evening when he tells you about his journey as a Salzburg entrepreneur.

… Because of Silicon Valley’s large private risk capital pools and attractive startup ecosystem, many startups based on incremental innovation have flourished, but the long-term survivors, now industry leaders, remain few in number—this is a widespread reality in the world of technology: think of the semiconductor industry’s implosion since the 1980’s; the browser, search engine, and ecommerce wars of the late ‘90’s; and the social media wars of the 2000’s—giants have emerged, but many more players have fallen on the battlefield. Let’s not forget that Microsoft had a huge monopoly in operating systems in the 90’s. Apple’s iOS & Google’s Android emerged, challenged, and overtook operating system dominance in the space of a few short years.

In America, Silicon Valley’s cycles of creative destruction and renewal continuously spawn many new challengers– by funding multiple startups that compete relentlessly until they reach dominant self-sustainability, acquisition by a competitor, or bankruptcy. This has not occurred without excess and without some years recording staggering losses.

But the fundamental concept that entrepreneurs have the freedom to fail, and that, if they are worthy, the resources are out there to support them to try again, is at the core of the culture of entrepreneurial success that defines Silicon Valley.

Ideally, innovative startups should be built on ideas that face little or no competition—and this is one of Peter Thiel’s key messages to entrepreneurs who want their startups to be “born global”. Peter Thiel was born in Germany, co-founded PayPal and Palantir, and is one of the most successful venture investors in the world through his Founders Fund. He published the book Zero to One in 2014 . In this book Thiel urges entrepreneurs to pursue only breakthrough innovation: “don’t compete, truly innovate—competition sucks your profits away—find a way to have a monopoly.”

Thiel’s core thesis to get from zero to one is all about breaking through and doing something really new, and he encourages starting on a small scale: “Start small and monopolize.Once you create and dominate a niche market, then you should gradually expand into related and slightly broader markets.”

With this in mind, and of direct relevance to Salzburg’s entrepreneurial initiative, I will now point out several of the most important elements for establishing a successful center for global excellence in innovation and assess their viability in Salzburg:

Defining a Global Center

To be more than moderately successful today, any startup’s potential must be considered on a global scale from its inception. This means that all entrepreneurs must be aware of competing global technologies and try not to step directly in their paths— I have visited entrepreneurs from Finland to Shanghai to Santiago who are simply not doing the work required to be aware of the best in class technologies, of their competitors at other startups, and they don’t really know how to find out what is happening in Silicon Valley.

Silicon Valley Special

In closing, I would like to highlight how we believe that Salzburg can be transformed into a vibrant global center of innovation excellence. Salzburg is blessed with several key elements that are necessary preconditions for a global innovation center of excellence to emerge …

I do see challenges with respect to overcoming some of the cultural barriers to an entrepreneurial culture—specifically in developing and nurturing a cultural understanding and tolerance for entrepreneurial failure. But at the same time I am convinced that there is a real opportunity for global collaboration, supported in partnership with leading international corporations from the Salzburg business community, that can attract the best and the brightest entrepreneurs to FH Salzburg.”

Salzburg Advantages

Partnership for Freedom– Rethinking Supply Chains Challenge Grant Awarding $500,000 to Entrepreneurs

I am excited to join in announcing the launch of Rethink Supply Chains: The Tech Challenge to Fight Labor Trafficking from the Partnership for Freedom, for which I will be serving as one of the judges.

The Rethink Supply Chains Challenge is a call to action to a wide range of communities – developers, designers, social entrepreneurs, advocates, and innovators – to apply their talents to a critical cause: ending forced labor and modern slavery in the global supply chain.

In today’s global economy, forced labor remains a critical problem across a range of industries, including manufacturing, fishing, agriculture, and mining. Due to the complex nature of supply chains for goods and services, however, it’s often difficult for businesses, workers, NGOs, and governments to understand where forced labor is occurring and how to take action to remedy it.

In response to this problem, the Challenge is seeking creative tech tools and solutions that target key problems in how we prevent, identify, and address forced labor. From finding new ways for companies to connect directly with workers to improving the traceability of products in high-risk supply chains, the Challenge seeks innovative approaches that leverage technology to provide better results. It will be supporting the best of the ideas through a $500,000 prize pool for finalists and winners.

The first round of the challenge is open until December 13th. I hope you’ll visit the Partnership for Freedom website and spread the word.

 

Drinking Kosher vs. Non-Kosher Wine in Israel: Soon to be an Irrelevant Topic

Traditionally, kosher wine has been dismissed by wine connoisseurs as excessively sweet, unappetizing, and certainly only called for as part of the ritual observance of Jewish holidays. For me, Manischewitz wines define this category.  Whereas kosher hot dogs are viewed by many consumers as better than regular hot dogs (Hebrew National comes to mind), and kosher salt somehow evokes something special that makes some consumers believe it is better than non-kosher salt, kosher wine is viewed as inferior to non-kosher wine. This is because mass-produced, inexpensive kosher wine is boiled through the pasteurization process to be made kosher. Boiling wine is not a good thing.

However, pasteurization is not necessary for a wine to be kosher. To be kosher, specific rules, including rabbinical supervision, must be observed with respect to how the wine is handled from the moment that the juice is expressed from the berry to the moment it is bottled.  As long as the winemaker is skilled at wine making and the grapes are of high quality, these ritual observances need not have any negative impact on the quality of the wine produced.  You can still make a bad kosher wine, but you can also make an extraordinary wine in Israel that happens to be kosher.  For more on the rituals associated with making kosher wine, click here.

Based on my recent wine tasting experience in Israel, I am now convinced that the kosher element can be a footnote to the wine, not its defining feature, whereas the positive differentiation with the wine can be that it is of Israeli origin.

Kosher wines that are made kosher without pasteurization are called non-mevushal. In my view, mevushal wines are on their way to oblivion.

We drank both kosher and non-kosher Israeli wines on our trip. I believe that no more than 10 years from now, Israeli wines will be considered competitive with other global wine regions of excellence entirely on their merit as wines, with the kosher label being a footnote to non-Jews who appreciate fine wines and a welcome fact for Jews who observe kashrut.

 

 

Israeli Red Wines: Some Vintners are Releasing Promising Wines Too Early

We tasted too many 2012’s and 2013’s that our group felt were prematurely available for retail purchase— not because they are not excellent wines, but because they need an additional 12-18 months of bottle aging before reaching the consumer. Selling wines too soon, when they are not approachable, can leave you with too much tannin on the finish, closed or muted fruit aromas, and an overall flatness on the palate that hides the complexity of what can evolve to be a great wine in another year.  Professionals, who have the benefit of knowing the full spectrum of how a wine tastes at various stages of its maturity, can evaluate a wine’s promise when it is in the barrel years before its release.  For regular consumers, especially in a nascent domestic wine appreciation culture such as Israel, the result of offering a wine to the public too early may be poor customer experience.

Moving into the red zone, one of the more colorful winemakers we met is Shuki Yashuv of Agur, a boutique winery producing about 10,000 bottles a year. Shuki learned how to make wine from the founder of Tzora winery, Ronnie James, and he holds strong opinions about everything. While his approach is representative of the Israeli New Wave, he could be the father of several of the other leading edge winemakers.

Agur is hard to find but hard to forget once you’ve found it. The 2011 Agur Special Reserve, aged in French barrels (50% new oak) for 18 months, is a blend of 40% Cabernet Sauvignon, 30% Merlot, and 24% Cabernet Franc. This wine is black velvet, with wonderful fruit on the palate, and a tobacco finish. The 2013 Agur Layam Syrah blends 50% Syrah with 50% Mourvédre, with each varietal aged separately in second year barrels until blending at the time of bottling. The oldest vines used for this wine are 19 years old.

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Shuki Yashuv with Inbal Baum of Delicious Israel

The terroir from these Israeli wines brings black olive, tobacco, and spice box into your palate—the Bordeaux blends, like the 2012 Agur Kessem (40 percent cabernet, 30% merlot, 25 percent cabernet franc, 5% petit verdot), don’t even try to emulate Bordeaux- they stand apart as distinctively Israeli.

We then visited Tzora in the Judean Hills for a delicious lunch and a tasting of some of their finest wines. Eran Pick, winemaker and our gracious host, has a UC Davis/California Bachelors in Oenology and Viticulture and is among a prestigious group of Israeli winemakers with UC Davis credentials including Israel Flam (former chief winemaker at Carmel), Gil Shatsberg of Recanati, Lewis Pasco (formerly of Tishbi & Recanati and now the Lewis Pasco Project) and Dr. Yair Margalit. He works closely with Jean-Claude Berrouet (Pétrus, Dominus). We expect to be hearing in the near future that Eran has joined the exalted and rarefied Masters of Wine (MW).

We were also fortunate to have wine maker Ari Erle and well-known foodie Inbal Baum of Delicious Israel as our guides during different parts of our journey. Ari is a UC Davis trained Napa Valley veteran (former assistant winemaker at O’Shaughnessy and Elizabeth Spencer) who is emblematic of the leading edge of wine making in Israel. He is the general manager and winemaker for Bat Shlomo vineyards. Founded in 2010, Bat Shlomo winery is located in a village that was established in 1889 as a daughter-settlement of Zichron Ya’akov, funded by Baron Edmund James de Rothschild, and was named after Betty Salomon , the daughter of Salomon Mayer von Rothschild (the Baron’s uncle and grandfather). Bat Shlomo is undergoing a complete renovation and wine program expansion under Ari’s guidance. Among other projects, Ari is also working with Napa Valley’s Jeff Morgan of Covenant wines to make Jeff’s first Israeli wine, kosher, of course.

We concluded our journey to Israel with a stay in Tel Aviv, whose highlight was a spectacular dinner at what may be the best restaurant in the country, Catit. Chef Meir Adoni spoiled us with an extraordinary menu rivaling Thomas Keller’s French Laundry.  Before dinner we enjoyed a walking  tour of Jaffa and the open air market in Tel Aviv, sampling amazing street foods with Inbal Baum.  This was truly a memorable trip that Yitz Applbaum and I were delighted to host for the benefit of the charities supported by the Napa Valley Vintners.

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Israeli White Wines of Note: Sphera and Jezreel

Winemaker Doron Rav Hon of Sphera White Concepts has pioneered an Israeli winery that makes only white wine—the portfolio includes Chardonnay, Sauvignon Blanc, the First Page blend, and the White Signature blend. Doron believes in minimal intervention with the grape in making the wine, from the moment that the juice is expressed from the berries, its cold fermentation process in steel tanks, to the bottling. Most of his wines are un-oaked, fermented in steel tanks for 7-8 months, and bottle aged until release. The result is a smooth, refreshing, low alcohol (12.5%-13.0%) low PH (approximately 3.5)  feast for your palate. Paired with artisan cheeses, I believe this wine will confound experts in blind tastings. The 2014 Sphera White Concepts chardonnay, to be released in May, is redolent of watermelon and has mineral notes that I can’t wait to taste against several White Burgundies. At 95 shekels retail, (about US $25) with only 4,500 bottles produced, Sphera is entering the market with a splash!

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Doron Rav Hon hosts a tasting…

 

 

 

 

 

 

 

 

 

Another extraordinary white that we tasted is the 2014 Jezreel Levanim Gewurtzraminer Blend—imagine a blend of Gewurtzraminer, Chardonnay, and Colombard—have you ever had that anywhere else or even heard of such a blend?

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What Defines the “New Wave” of Israeli Winemakers?

A key thing to keep in mind is that the New Wave of Israeli wine really is new, with some of the more interesting wineries no more than five years old. Many of them currently have no estate fruit, though they are developing estate vineyards. While these new vineyards mature, wineries buy grapes from selected established vineyards. Visiting the wineries, it is easy to sum up several of the crushing, fermenting, and bottling operations as Garagistes who are going to the next level. The results of their early efforts, however, are surprisingly outstanding!

We tasted a wide range of wines on the trip, from both newer and well-established wineries, ranging from Benhaim, Dalton, Pelter, Teperberg, Clos de Gat, Montefiore, Galil Mountain Winery, Golan Heights Yarden, Sphera White Concepts, Agur, Tzora Vineyards, Jezreel Valley Winery, Bat Shlomo Vineyards, Flam, Yatir, Amphorae, and Lewinsohn. Among these the Sphera, Tzora, Agur, Bat Shlomo, Lewinsohn, and Jezreel wineries were exceptional.

One of the distinctive elements that characterizes the New Wave of Israeli wine making is that the younger up-and-comers have chosen to innovate through the blending of varietals that emphasize the craftsmanship of their wine making and show off the terroir of their appellations. What does that mean? Have you ever tasted a white wine that is a blend of 60% Pinot Gris, 30% Semillon, and 10% Riesling (2013 Sphera White Concepts First Page)? How about a red wine that is a fusion of Carignan, Syrah, and Argaman (2013 Adumim from Jezreel Valley Winery); or the 2014 Levanim from Jezreel, which is composed of a blend of Chardonnay, Colombard, and Gewurtzraminer?

These wines are excellent!

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From Napa to Jerusalem: Levensohn Vineyards Goes to Israel

I recently returned from an extraordinary trip to Israel with the four winners of the Levensohn Vineyards Auction Napa Valley 2014 live auction lot. Joined by my friend and Israeli wine collector Yitz Applbaum, we co-hosted the first ever Napa Valley Vintners tour of Israel’s wine country. Our group visited important religious and archaeological sites in Jerusalem and Galilee that are not generally open to the public and met with some of the driving forces who are at the leading edge of the Israeli food and wine culture. While I have been to Israel many times, our four guests, who are not Jewish, had never visited Israel before.

In the Galilee, guided by Norma Franklin, PhD, from the Zinman Institute of Archaeology at the University of Haifa, we visited an active archaeological dig at the site of a winery estimated to be close to 3,000 years old. The winery overlooks a site that can be traced to the Biblical story of the treacherous Jezebel and her scheme to appropriate Naboth’s vineyard, as told in the Book of Deuteronomy.

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Naboth’s Vineyard winery?

Fast forwarding to 2015, we all were positively surprised by the high quality of the wines that we tasted and greatly enjoyed meeting the New Wave of Israeli winemakers, professionals who have trained in centers of wine making excellence including Napa, Burgundy, and Bordeaux. Many hold oenology degrees from UC Davis.

Most importantly, we developed a sense of the distinctive terroir of the three different wine regions of Israel that we focused on—the Golan Heights, the Judean Hills, and the Jezreel Valley in Galilee.  More on the wines we tasted in the posts that follow….

Governance Models That Don’t Scale: The World According to Charles T. Munger and Jean Jacques Rousseau

JJRMungerCan you name five benign dictators who have ruled successfully for any meaningful period of time (non-fiction)? Can you name five successful, long serving CEO’s (excluding Warren Buffett) whose governance histories are free of the “high-beta” associated with outliers such as Larry Ellison and Steve Jobs?

It’s not easy. Why? Because enlightened dictators and their corporate CEO equivalents are very, very rare; maintaining immunity to the intoxicating effects of power challenges basic human nature.

It is in this context that I found “Corporate Governance According to Charles T. Munger”, a brief article from the Stanford Closer Look Series, thought provoking if not practical. The article was written by David Larker, Director of the Corporate Governance Research Program at the Stanford Graduate School of business, and Brian Tayan, a researcher with Stanford’s Corporate Governance Research Program.

The authors summarize and explain Berkshire Hathaway Vice Chairman Charles T. Munger’s unorthodox view of a model for corporate governance.    According to the article, Munger believes that corporations and their boards should empower their CEO’s more, not less. Munger’s effective CEO, modeled, of course, on Warren Buffet, should be unencumbered by rigid process and freed of unnecessary, excessive checks and balances. Why? So that the CEO can lead effectively. How? In Munger’s construct, CEO’s police themselves, holding themselves accountable to their loosely overseeing directors by binding themselves to a trust based system. And corporate directors should reward these CEO’s for creating shareholder value, while deliberately underpaying them in terms of their annual salary-based cash compensation. According to Munger, and as quoted in the article:

“Good character is very efficient. If you can trust people, your system can be way simpler. There’s enormous efficiency in good character and dis-efficiency in bad character … We want very good leaders who have a lot of power, and we want to delegate a lot of power to those leaders…The highest form that civilization can reach is a seamless web of deserved trust—not much procedure, just totally reliable people correctly trusting one another.”

I agree with Mr. Munger completely, while asking the same questions raised by the authors at the end of this article:

“The trust-based systems that Munger refers to tend to be founder-led organizations. How much of their success is attributed to the managerial and leadership ability of the founder, and how much to the culture that he or she has created? Can these be separated? How can such a company ensure that the culture will continue after the founder’s eventual succession?”

Unfortunately, and founders notwithstanding, the collective global capitalist experience since private property rights were invented and enforced has shown that there aren’t enough of those people on this planet.

kozlowskimug1For a specific cautionary example, I am reminded of Tyco International and its former CEO, Dennis Kozlowski. Kozlowski was recently paroled, almost twelve years after his indictment, ultimate conviction, and after serving over eight years in Attica, for a $134 million corporate fraud (this amount represents a small fraction of the losses suffered by public shareholders). The disgraced former directors of Tyco International (vintage 1999), seemingly highly trustworthy and accomplished men and women, also come to mind. This group, along with the enterprise builders at Enron, Worldcom, and Adelphia, to name just a few, are at the top of my list of examples of poor corporate stewardship and help explain why Mr. Munger’s model for corporate governance is still-born.

But I did say the article was thought provoking, as Charles Munger’s corporate governance philosophy, in my view, evokes Jean Jacques Rousseau’s concept of the Lawgiver.  Author Alex Scott summarizes Rousseau’s core thesis from the Social contract succinctly in this excerpt from his book, The Conditions of Knowledge: Reviews of 100 Great Works of Philosophy :

“The general will always desires the common good, says Rousseau, but it may not always choose correctly between what is advantageous or disadvantageous for promoting social harmony and cooperation, because it may be influenced by particular groups of individuals who are concerned with promoting their own private interests. Thus, the general will may need to be guided by the judgment of an individual who is concerned only with the public interest and who can explain to the body politic how to promote justice and equal citizenship. This individual is the “lawgiver” (le législateur). The lawgiver is guided by sublime reason and by a concern for the common good, and he is an individual whose enlightened judgment can determine the principles of justice and utility which are best suited to society.”

I agree! Let’s find that individual and give him (or her) the keys to the public policy car! Munger’s corporate lawgiver, the enlightened CEO, is also an admirable model worth aspiring to emulate.

As with Rousseau’s 1762 treatise, history has sadly shown us that we lack sufficient incorruptible raw material across the entire history of mankind to render the “lawgiver” experiment successfully scalable, be it in public government or corporate governance.

The unbridled exercise of power is the ultimate intoxicant, and very few humans can responsibly limit the flow of that drug, especially not when they have are given the opportunity to administer it to themselves.

 

 

Early 2014 Harvest for Napa Valley—Hard Data Provides Perspective on the Impact of Global Warming

As we walked through the Levensohn Vineyard last week with our viticulturist, Zach Berkowitz, and our vineyard manager, Stan Zervas, of Silverado Farming, Zach cut into a green berry from one of our vines. He explained that we are now 50% of the way through the growing season for the 2014 vintage because the seeds in the grapes are now turning crunchy and hardening.Grapes Levensohn 6 22 14

We expect harvest to occur three weeks earlier than our 2013 crop, which was picked on October 3. Since we replanted the vineyard in 2000, this may be the earliest Levensohn harvest yet (our latest was just before Halloween in 2005).  A key factor impacting the rate of grape maturity is the air temperature during the growing season. In the wine industry, the number of Growing Degree Days (GDD) measures this.

According to Washington State University, “The progression of in-season grapevine development is strongly influenced by air temperature. As such, average heat accumulation is often used to compare regions and vine growing condition. This average heat accumulation is often refereed to as Growing Degree Days (GDD). The summation of daily GDD units can be used for a variety of things: comparing one region to another, comparing one season to another, and predicting important stages in vine development (bloom, veraison, and maturity). … GDD are calculated by subtracting 50 from the average daily temperature (°F). If the resulting value is less than 0, then it is set to 0. Thus, daily GDD units are always positive.”

Silverado Farming recently published the following report on GDD for 2014:

Clusters in early season varieties are starting to grow tight. This continues to be an early season, as bloom and fruit development are earlier than usual. Growing degree days are still a little behind last year, but we are catching up. A month ago, 2013 had the most GDD over the last 21 years. Today, 1997 is the leader. The coolest season was 2003, but now 1998 takes that category. We are at 972 GDD, which is 17 GDD, or about one day, behind 2013.

We are eight days ahead of the average, meaning 972 GDD was achieved 21 June in the average year. Finally, 2014 is has the fourth highest GDD accumulation, trailing only 2013, 1997, and 1996. The chart below shows accumulated GDD for four key years since 1994. These include this year, the year with the most accumulated GDD (1997), the year with the least accumulated GDD (1998), and the 21-year average. 2014 is clearly warmer than the average, but about six days behind 1997. The NWS Climate Prediction Center continues to show high probability for a hotter than normal summer, so above average GDD may well continue this season.

It’s possible, but unlikely in my view, that 2014 may have lower GDD than 2013. But we also have to consider the exceptionally mild winter we had and the unprecedented severity of the California drought in any assessment of how things are changing in the Napa Valley for grape growers and winemakers.We do expect an excellent harvest again this year, with high fruit quality for cabernet sauvignon. All signs are encouraging at this mid-point in the growing season. But it would not be surprising to see 2014 overtake 2013 as having the most GDD since 1994 and continuing the trend of well above average GDD. We don’t see this trend reversing.

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