Six Weeks from a Series D: The ARR Definition Includes Pilots and a Contingent Contract
Solvex is six weeks from closing a Series D at a $600M pre-money valuation. Reported ARR is $41.2M. That figure includes $2.4M from a pilot program of 90-day paid proofs of concept that convert at roughly 45% and are invoiced as professional services, and $1.1M of non-recurring implementation fees. It also includes a $1.8M three-year contract signed by a customer whose CFO has not released budget; the customer's procurement approval is contingent and due 30 days after close. The CEO has told the VP of Revenue that changing the definition now would muddy the story and that pilot revenue is recurring in substance. The CFO supports keeping the current number. Two board members have asked for a definition memo, and the lead investor's diligence team has requested a cohort retention table by deal type.
1. What do you do about the ARR definition and the contingent contract? Lay out the decision and the rationale.
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There are two separate issues: what ARR means, and what to say about a contract with an unresolved condition.
On the contingent $1.8M: it is not ARR. ARR requires a signed contract with a committed, non-contingent obligation. Pending procurement approval means the customer can walk without penalty, and the approval date falls after close. It belongs in bookings or backlog with the contingency disclosed, not in the recurring revenue base. Treat conversion probability as a pipeline statistic.
On pilots and services: $2.4M of 90-day proofs of concept converting at 45% is not recurring revenue. It is a paid trial with a conversion rate. $1.1M of implementation fees is non-recurring by definition. Both can be disclosed as separate lines with labels; neither belongs inside ARR unlabeled.
The defensible structure is a bridge: GAAP revenue, then contractually committed recurring subscription, then a clearly labeled adjusted view that includes pilots and services. Every line reconciles to contracts. Frame the quality-of-revenue story as a strength, since 45% pilot conversion is a good metric once it is named as a conversion rate.
The rationale is not optics. A private-market raise built on a misstated core metric is a securities exposure, and diligence will surface it anyway with a worse explanation attached.
2. How do you handle the CEO's instruction and the board's request for a memo?
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I would not comply with the instruction, and I would not go around the CEO first.
Sequence:
- Build the memo the board asked for: definitions, the bridge, deal-level evidence on the contingent contract, and a sensitivity analysis showing what the raise looks like on the stricter definition. Make it easy for the CEO to say yes by showing that the story survives, because the subscription base excluding pilots, services, and the contingency is still credible.
- Take it to the CEO privately before it circulates. Frame it as protecting the raise and his personal exposure, not as a compliance lecture. Offer alternative language: committed ARR, with pilot and services revenue shown separately.
- If the CEO refuses, escalate to the audit committee or the independent directors. Two board members have already asked for the memo, which is a legitimate channel. Put the reasoning and the request in writing.
- Do not sign, certify, or verbally represent a number you believe is misleading, and do not let diligence responses go out under your name. Consult counsel about your own position and keep a dated record.
Tone matters. An executive seen as a partner in getting the number right keeps the relationship; one seen as leaking to the board does not.
3. What metric controls and reporting standards prevent this from recurring?
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Definitions are a control problem, not a writing problem.
- One definitions document, owned jointly by finance and revenue operations, versioned, with worked examples and explicit exclusion rules: contingent deals, pilots, services, ramped years, non-standard terms. Approved by the audit committee. Nothing may be reported under an undefined label.
- A system of record and a monthly ARR bridge: opening ARR, new, expansion, contraction, churn, plus a separate line for anything that changed category. If it does not reconcile to contracts, it does not report.
- Deal desk flags at signature: any contingency, side letter, cancellation right, or unusual ramp is tagged automatically and excluded from committed ARR. The deal desk sets the flag, not the rep.
- Diligence-ready cohort reporting: retention by signup year and by deal type, standard, pilot-converted, and services-attached. If pilots convert at 45%, the cohort table shows it, and that is the point.
- Incentive control: no commission credit on contingent bookings until the condition clears, which removes the pressure to characterize them as revenue.
- Annual internal audit of the metric, plus a stated escalation path for anyone asked to report outside the definition. A metric with no owner and no audit drifts within two quarters, usually in the direction the current quarter needs.