Legal Tech’s ARR Problem – Industry Responses

Yesterday, Artificial Lawyer highlighted calls for more clarity when it comes to the use of the term ARR (annual recurring revenue) – in particular by Spellbook CEO, Scott Stevenson. Here are some of the responses from several companies that were sent to AL.

Note: for more context please see the AL story – but generally the point is that ARR can be an unclear metric, which in turn causes misunderstandings across the sector, for staff, potential hires, peer companies, law firms and inhouse teams, investors, and the media. In short: we need more clarity.

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Ross McNairn, CEO, Wordsmith

‘We report on ARR. These are our definitions.

ARR (Annual Recurring Revenue) We define ARR as the actual revenue from active, 12-month annual contracts that have officially started. To ensure total transparency, we exclude all pilots, trials, and month-to-month contracts, and we never multiply a single month’s revenue by 12 to estimate our scale. Our ARR is always net of all discounts; if a contract is discounted by 10%, we report it as 10% lower.

CARR (Committed Annual Recurring Revenue) CARR represents our total legally signed commitments. The difference between our CARR and ARR (typically 5%) is strictly the time gap between a contract being signed and the “go-live” date when billing begins. We maintain a conservative “floor” for CARR: even though we know a customer will pay a higher price next year when a discount expires or an expansion renews for a full term, we don’t add back that future value today.’

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Reuben Miessen, CEO, LegalFly

‘At LegalFly, we only report what we call Live ARR.

That’s revenue from customers who are fully deployed, actively using the product, and generating revenue within their current contract term. If it’s not live and billing today, we don’t count it.

We explicitly exclude multi-year step-ups, future expansions (even if contractually agreed) and any deals that aren’t yet rolled out.

The reason is simple: ARR should reflect operational reality, not best-case scenarios.

What we’re seeing in parts of the market is companies reporting the final-year value of multi-year deals as ARR, even when those contracts have opt-outs or haven’t fully started yet. That can inflate perceived revenue by 2–3x.

That gap always closes: through churn, renegotiation, or missed expansion.’

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Winston Weinberg, CEO, Harvey (via LinkedIn)

‘Over the weekend Scott Stevenson, the CEO of Spellbook, started an important discussion around CARR versus ARR and implored the industry to take a hard look at what, exactly, companies are reporting and with what level of discipline and rigor.

I think he’s right, and Harvey intends to be transparent and consistent in our financial metrics and what we share.

Our gap between CARR and ARR is 4.9%, so CARR slightly leads ARR. It’s easy to manipulate charts, graphs, and pilots, it’s a lot harder to play the long game and build an enduring company with the trust of your customers. We intend to stay the course on the second path.’

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AL also asked Legora, in return they sent over a social media comment from CFO, David Eckstein, who joined the company in January. This site asked if the principles below had been applied to the ‘$1m to $100m ARR in 18 months’ announcement that Legora made recently, and their spokesperson said ‘Yes’.

‘Growth can only compound on a real foundation.

When you’re sitting across from auditors and investors quarter after quarter, you learn quickly that booking cleanliness isn’t optional; it’s the foundation on which everything else gets built. As a three-time CFO, these are lessons that stay with you for life. It’s a big part of why both Vanta and Legora have the reputations they do.

ARR should reflect economic reality, not projections. A few simple rules to follow:

1. ARR represents the annualized value of committed, contracted revenue

2. Pilots are excluded until a customer has exited the pilot phase and is under a binding contract

3. Discounted pricing is recorded at the discounted figure, not a future full-price amount

4. Where a customer holds an opt-out right, only include the committed period

None of this is complicated. It’s just discipline. The companies that endure are the ones where the numbers you celebrate externally are the same ones you’d defend under diligence.’

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And of course, Scott really got this debate going, so we naturally have to include Spellbook.

Scott Stevenson, CEO, Spellbook

‘Our ARR Definition:

Spellbook reports on Live Annual Run Rate, net of discounts, refunds and failed payments.

Monthly contracts are MRR multiplied by 12, annual contracts are simply their yearly totals.

We only report on active contracts that are being invoiced.’

He added:

‘The vast majority of enterprise AI companies are reporting CARR to press as their ‘ARR’, while having a different number internally. This is a new phenomenon with enterprise AI companies in particular. I was able to 100% confirm based on the financials of one popular Enterprise AI company that is publishing an ARR number 5x higher than what they are actually collecting live. This company is outside Legal Tech.’

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Conclusion

Some have said on social media that confusing or inaccurate ARR data – at least in terms of how people actually translate the data they read – is not a big issue. They argue that investors know ‘the tricks of the trade’, as it were, and therefore it’s an issue where ‘no-one gets hurt’.

AL would strongly disagree with that view. Truth is essential for financial markets to function, in fact any market, so too society as a whole. If we normalise the idea that companies can put out financial information that is likely to mislead, or be misinterpreted, then we are all the worse off for it.

Even if a small group of insiders can see through the smoke and mirrors, if people in general will be misled – whether that is intentional, or happens entirely by accident – then it still matters.  

Therefore it’s good to see the above companies making these statements. Clarity counts.

Richard Tromans, Founder, Artificial Lawyer.