There’s a quiet little trick happening across the enterprise AI landscape. Startups are reporting annual recurring revenue numbers that look incredible on pitch decks and press releases, but bear little resemblance to the money actually hitting their bank accounts. Scott Stevenson, co-founder and CEO of legal AI company Spellbook, decided to say it out loud.
In an April 2026 post on X that racked up over 200 reshares, Stevenson called out the widespread practice of conflating “Contracted ARR” with actual revenue. He identified instances where reported ARR was five times higher than what companies were genuinely collecting. The kicker: he says the investors backing these companies are fully aware of the gap.
The ARR inflation playbook
In traditional SaaS, ARR is a fairly straightforward metric. You take the revenue you’re currently generating from active subscriptions and annualize it. It’s supposed to reflect reality, not aspiration.
But a growing number of AI startups have adopted a looser standard called Contracted ARR, or CARR. CARR counts revenue from signed contracts and future commitments that haven’t materialized into actual payments yet. A company might sign a multi-year deal with an enterprise client worth $10 million, book that as part of its ARR figure, and conveniently skip mentioning that implementation hasn’t started and no invoice has been sent.
The result is a 3-5x gap between the number on the fundraising slide and the number on the income statement. This matters because ARR is the single most important metric VCs use to price early-stage SaaS and AI companies. Stevenson didn’t mince words, calling the practice a potential scam.
Spellbook’s transparency play
Spellbook, which builds AI tools for legal professionals, has taken a notably different approach. The company reports only its “Live Annual Run Rate,” derived exclusively from active, invoiced contracts. If the money isn’t flowing, it doesn’t count.
That distinction isn’t just philosophical. Spellbook closed a $50 million Series B in 2025 at a post-money valuation of $350 million, then followed it up with $40 million in venture debt from RBC in March 2026 to support acquisitions. Total funding raised sits north of $80 million. The company serves roughly 4,000 customers across 80 countries and tripled its revenue in 2025, with a target of $100 million ARR in 2026.
He’s not the only one making noise. Clio CEO Jack Newton and Y Combinator’s Garry Tan have both echoed similar concerns about revenue quality in the AI startup ecosystem.