ARR vs Contracted ARR: What Investors Now Check

Investors verify ARR by tracing it to three records: the signed contract, the live billing and the revenue in your books. ARR counts only subscriptions that are live and paying today. Contracted ARR adds signed deals that are not live yet. One VC told TechCrunch he has seen contracted ARR 70% above ARR, so show the two apart.¹

I work with founders in the four industries I go real deep in: technology (AI and SaaS), healthcare and biotech, pharma, and pharmacy. This piece is mainly for the AI and SaaS founder with a number on slide 1 and a raise ahead. I am not a CPA and the firm performs no attest work, so your auditor decides what counts as audit ready, and tax filing goes to a tax partner we trust. Every company number below is made up (illustrative, not a client) unless I cite it.

Picture the diligence call. Your Series A lead has your deck open to slide 1, which says $3.0 million of ARR, and she asks one plain question: which of these customers are live today? Your finance lead pulls the list, and 4 of the biggest contracts are signed but not yet turned on. Nobody lied, and the number just got smaller. By the end you will know how to define ARR at your company, bridge it to your books and show it on the slide.

ARR counts only what is live and paying today

Annual recurring revenue (ARR) is the yearly value of the subscription revenue your customers are live on and paying for today.² I keep that definition narrow on purpose. The SaaS Metrics Standards Board puts it plainly: "ARR should not include one-time fees or professional services even if they are recurring."³ Its standard also leaves out contracted deals that are not live yet, and it does not subtract a churn you only know about in the future.³

The math behind it is short. Bessemer's original cloud metrics post builds ARR from the monthly revenue you have already recognized, multiplied by 12.⁴ In my book that is the test. If you can point to last month's recognized subscription revenue, multiply it by 12 and land on your number, it is ARR. If you cannot, it has another name, and the name matters.

I will be honest that the market does not agree with me. ARR has no GAAP definition. Peony's diligence guide calls it a management metric with no GAAP definition,⁵ and Artificial Lawyer's April piece says ARR has no formally agreed definition, so a startup and its backers can make it mean what they want.⁶ Jason Lemkin of SaaStr argued in 2021 that ARR can include consumption revenue, even with no contract, as long as net revenue retention holds at 100% or more.⁷ That is a pitch standard, and I treat it as a loose one, not a diligence one.

Contracted ARR is a useful number until it wears ARR's name

Contracted ARR (CARR) starts with ARR and adds signed deals that are not live yet. Bessemer wrote that "CARR (Committed ARR) builds on the ARR concept by adding committed but not yet live contract values to total ARR"⁸, and then nets out forecasted churn or downsell. I like CARR as a planning number. Sales, hiring and implementation all need to know what is signed and coming. Stripe's guide on committed ARR says signed deals can slip, and Maxio adds the accounting point: CARR is worth tracking, and it is not something you can report as realized revenue.⁹¹⁰

The trouble starts when CARR wears ARR's name. TechCrunch reported in May that one VC said he has seen companies where contracted ARR is 70% higher than ARR, and the article's own verdict is blunt: "The main problem with CARR is counting revenue before a startup's product is implemented."¹ If implementation drags, customers can cancel before paying. AI companies feel this most, because they sign fast and turn on slowly, and a pilot can sit in the contract list for months.

Fortune ran the same story in 2025, and its sentence is hard to improve: "Founders are counting pilots, one-time deals, or unactivated contracts as recurring revenue, six VCs told Fortune."¹¹ A legal tech CEO went further in April 2026 and said the vast majority of enterprise AI companies report CARR to the press as their ARR, which is one executive's claim and not a measured rate.¹²

I want to be fair about this. Contracted ARR is not a bad number, and I assume most founders are not trying to fool anyone. They kept a pipeline spreadsheet, the signed deals went in, and the label drifted. That is why I tell founders to put both numbers on the page with their right names. An investor who finds the second one hiding inside the first reads you as hiding it.

Pilots and usage are not ARR until they convert

Pilots and usage are where AI companies get into trouble, because both look like revenue long before they look like recurring revenue. Intel Capital calls a usage spike experimental run-rate revenue, neither annual nor recurring, because customers experiment, spike their usage and then pull back.¹³ CRV says the same from the investor side: AI ARR often blends one-off contracts, credits-based pricing and outcome-based revenue, so revenue can look recurring when it is not.¹⁴

Here is how I think about it, in 3 rules. A pilot is not ARR until it converts to a paid subscription. A month of usage is not ARR, so show a trailing usage run-rate on its own line. And a ramp deal counts at what the customer pays this month, not at the rate in year 3. Peony's list of the usual gaps matches mine, and adds month-to-month contracts annualized as permanent.⁵

Run rate is a different animal again. Stripe's guide calls it a speculative figure that assumes current revenue extends over a year, and it takes in every kind of revenue, one-time fees included.¹⁵ In a post that Artificial Lawyer reported, Y Combinator's Garry Tan told founders: "Don't mistake one tier for another. Be precise, and always be truthful."¹⁶

ARR, contracted ARR, run rate and bookings are four different numbers

Here is the comparison I use with founders. Bookings are the contracts you signed, ARR is what is live, contracted ARR adds what is signed and waiting, and run rate is anything you annualize. The last column is the one an investor cares about, because it says where the number ties in your books.

Bookings is where founders get tangled. a16z said it in 2015 and it still holds: letters of intent and verbal agreements are neither revenue nor bookings.¹⁷ Ben Murray of The SaaS CFO notes that bookings are a non-GAAP term for the value of executed contracts.¹⁸ The one audited cousin is remaining performance obligations, the contract price a public company has not yet recognized, which it discloses under ASC 606 and may omit for contracts of a year or less.¹⁹ Public companies disagree with each other too: Q2 Holdings counts contracts that have not yet commenced in its ARR.²⁰

Investors rebuild ARR from three records

Investors rebuild ARR from three records, and I would build the same bridge before they ask. Papermark's 2026 diligence guide describes them this way: the billing export shows what was invoiced, cash collections show what was paid and the deferred revenue rollforward shows what was recognized. Its line is blunt: "Any ARR that cannot be traced to all three gets challenged."²¹ Peony walks the same chain, from ARR to billings to the change in deferred revenue to recognized revenue.⁵ Both are practitioner guides, not surveys.

I learned this as a senior auditor. I spent about 4 years at a Phoenix CPA firm auditing charter schools, school districts and governments, and an auditor never takes the number you hand over. She asks what it ties to, then asks for the document. When a Series A lead asks for your ARR schedule she is doing the same thing, and that is why I want the bridge, the contracts and the billing records in one folder before anyone asks.

What do they look at? The top 20 to 30 contracts by value, reference calls with 5 to 15 customers and an ARR bridge across the last 8 to 12 quarters, per the same Papermark guide.²¹ One divergence matters most. If ARR growth runs ahead of recognized revenue growth for 4 quarters in a row, Peony calls that definitional, meaning the gap comes from what management counts as recurring.⁵

There are public cases, and they are the reason investors ask. In September 2024 the SEC charged the former CEO of SKAEL, a software startup, with raising more than $30 million from investors after falsely claiming millions of dollars in annually recurring revenue.²² The complaint alleges a December 2021 deck said ARR had grown to $7.2 million, and then says "In reality, SKAEL never had any more than $170,000 in ARR at any point from 2020 to 2022."²³ It also alleges doctored bank statements. These are allegations in a complaint, not findings.

HeadSpin is the case that ended in a plea. The SEC alleged in 2021 that its former CEO defrauded investors by "falsely inflating the company's key financial metrics and doctoring its internal sales records"²⁴. In 2023 the Justice Department announced he pleaded guilty to securities fraud and wire fraud and admitted giving investors inflated ARR numbers.²⁵ CFO Dive reported that he had sole ownership of the ARR spreadsheet and that he rebuffed his board's calls to hire a CFO.²⁶

Both are fraud cases, not messy books, and I am not saying a fractional CFO would have prevented either one. What I take from them is practical. The person who sells the number should not be the only person who owns the file behind it. In my book the file belongs to finance, it ties to the bank every month, and someone other than the founder reconciles it.

A $3.0 million slide shrinks to $2.1 million when it ties to the books

Here is the back of the napkin version, on illustrative numbers (not a client). An AI software startup puts $3,000,000 of ARR on slide 1. Its September recognized subscription revenue is $175,000, after $150,000 in July and $162,000 in August. Inside the $3,000,000 sit $2,100,000 of live subscriptions, $480,000 of signed contracts that are not live yet, $150,000 of paid pilots annualized, $240,000 from annualizing one usage month of $20,000 (the usual month is $5,000) and $30,000 of one-time onboarding fees.

Now walk it down. Take out the $480,000 signed but not live, the $150,000 of pilots, the $240,000 usage spike and the $30,000 of fees, and you land on $2,100,000. That ties to the books: $175,000 of September recognized subscription revenue times 12 is $2,100,000. The deck was about 43% above the number the ledger supports.

Then roll the quarter. The 3 months of recognized subscription revenue add up to $487,000, which is $1,948,000 if you multiply by 4. The $152,000 between that and $2,100,000 is growth inside the quarter, because September is bigger than July. That is a timing difference, not an error.

On slide 1, I would show live ARR of $2.1 million, then contracted ARR of $2.58 million with the $480,000 labeled signed, not live, and keep the pilots and the usage run-rate ($60,000 at the usual $5,000 a month) underneath on their own lines. The investor sees every dollar of the $3.0 million and knows which part is which.

I report ARR the way I would want to defend it

Here is how I would set it up. Write one page that defines ARR, contracted ARR, usage run-rate and pilots, the way the SEC asks public companies to define a metric and how it is calculated.²⁷ State your churn timing, because it changes the number: the SaaS Metrics Standards Board deducts churn in the month the change contractually occurs, and Founderpath recommends subtracting at notice and saying which rule you used.² Net out discounts, refunds and failed payments, the way Spellbook says it does when it reports live annual run rate.¹²

Then tie it every month. Run the schedule from the billing system, tie it to recognized subscription revenue times 12, and keep the bridge for any gap. Keep a retention cut next to the ARR number, because Bessemer's State of AI report warns that topline ARR does not always guarantee a healthy business.²⁸ I wrote about the metrics investors ask for in The SaaS Metrics Investors Ask For Before a Raise, and the schedules behind recognized revenue are in What Is Deferred Revenue in SaaS.

Your industry changes the plan

For an AI company, everything above applies sooner, because usage and pilots are the product. For a biotech, pharma or pharmacy company, ARR is usually the wrong metric, because revenue arrives as milestones, grants, royalties or prescription volume, and the numbers investors test are accruals and cash. Through a High Rock Accounting engagement, I served as the sole accountant on a clinical-stage biopharmaceutical client's month-end close, owning its preclinical, clinical, manufacturing and general accruals through its Nasdaq IPO. That job taught me the same lesson from the other side: whatever number you show, someone will ask what it ties to. If ARR may not fit your model and it is not my lane, I will say so.

If you only do 4 things after reading this, do these, and do them before your next investor call so nobody has to rebuild your number for you:

1. Write your ARR definition on one page. Live, paying subscriptions only, with pilots, usage and signed-not-live deals on separate lines.
2. Tie live ARR to last month's recognized subscription revenue times 12. Keep a one-line bridge for any gap.
3. Put contracted ARR on its own line with its own name. Say how long signed deals take to go live.
4. Put the billing export, the cash collections and the deferred revenue rollforward in one folder. Do it before the diligence call.