I did check that page first actually, and the only thing that I caught was “Once the form is in use”. So, it might be helpful to others if they added what you stated – “The instance name (and instance number) are created when the form is first submitted.”
I like your second option, the first makes sense, but i think it could result in extra forms being created. Example, a user starts a form, doesn’t get very far and just closes it. Later when they decided to try filling out the form again I could see users starting a new one and not realizing there was one already started.
The only problem with the second option is the format we decided on for our instance names is like this – <FormTitle>_<CustomerName>_<InstanceNumber>. So, I dont know how we would generate the correct Instance Number. Any ideas?