Hey! I have been struggling to figure out this software update error all day. I found a solution by deleting my iPhone software and deleting the Apple Watch app, then restarting both my watch and iphone. Then I re-downloaded the Apple Watch app and started to pair and update. Pairing was a success and it started to update.
How to delete software update (which can be re-downloaded):
Iphone settings > General > Iphone Storage > scroll down until you find "Software Update" > Click> then press delete update.
** you could also delete the Apple Watch App from this iPhone storage section.
I hope that helps! Good Luck!