The 5 Most Important Software Revenue Recognition Issues (a Lawyer’s Perspective)

From the perspective of an attorney working with a Boston venture capital firm, here are the 5 most important revenue recognition issues (based on my experience). 

1. Acceptance. Make sure there is express language in the license agreement or order that states that the software is ‘accepted’ on the order date. I can bore you with all of the reasons why, but I would simply add this one. 
2. Warranties with Refund Rights. This is a pretty thorny issue, but in general, other than a standard limited duration performance warranty that the software will perform in material accordance with its documentation, any additional warranty with refund rights could create a real revenue recognition risk. 
3. Future Deliverables. If you think about it, this should be an easy one. The customer is buying the license for the software (as it currently exists), so there should not be any commitment regarding future enhancements (other than standard maintenance/support), in the contract or outside the contract.
4.  Signed Agreement. While this should be a no-brainer too, having a signed agreement (that means by BOTH parties) is critical to a final deal. While most people focus on getting the deal done, it is really not done until the agreement is signed (More on this topic on this bog: When is a Deal Done). By the way, enforceable electronic or click contracts should be fine.
5. Fee is Clear and Collectible. The license agreement and order should be clear about what the customer will receive and what they will pay for. This seems pretty basic to me, but it should not be overlooked with vague descriptions of what will be provided, or unclear and definite payment/fee terms. 

When working with the OpenView portfolio of expansion stage companies, or any company looking for growth venture capital, I try to remind them of these basic rules (at least a lawyer’s take on them). 

More Details: Here is some reference material on this topic: PWC Material