What is the Rule of 40?

The Rule of 40 states that a healthy SaaS company's revenue growth rate (%) plus its profit margin (%) should equal or exceed 40. It was popularized by Brad Feld and is widely used by venture capitalists to assess SaaS businesses.

Which profit margin should I use?

Most practitioners use EBITDA margin or free cash flow (FCF) margin. EBITDA is more common for early-stage comparisons; FCF margin is preferred for mature businesses. Avoid using GAAP net income margin without adjusting for stock-based compensation.

What if my margin is deeply negative?

A large negative margin requires correspondingly high growth to compensate. For example, a -20% margin requires 60%+ growth to still hit 40. This is acceptable for very early-stage companies but becomes unsustainable over time.

Is 40 the hard threshold, or is higher better?

Higher is better — 40 is the floor investors use to distinguish balanced businesses from those burning too much without sufficient growth. Top-tier SaaS companies often score 60–80+ at scale.

How often should I calculate this metric?

Quarterly is standard. Compare the trailing twelve months (TTM) for smoothed results, or the most recent quarter annualized for a real-time signal.

Rule of 40 Calculator

Name: Rule of 40 Calculator
Availability: InStock
Author: Nham Vu

Add your revenue growth rate (%) and profit margin (%) to get your Rule of 40 score — a score above 40 signals a balanced, high-performing SaaS business.

Inputs

Revenue Growth Rate (%)

Year-over-year revenue growth. Enter a negative value if revenue declined.

Profit Margin (%)

EBITDA margin or free cash flow margin. Negative values accepted.

Margin Type (for reference)

EBITDA Free Cash Flow Net Income

Rule of 40 Score

35% growth + 10% margin

Score Breakdown

Revenue Growth 35%

Profit Margin 10%

Combined Score 45

Benchmark Ranges

60+ Elite — top-tier SaaS

40–59 Healthy — investor benchmark met

20–39 Caution — growth or margin needs work

Below 20 Unhealthy — urgent rebalancing needed

Common Growth vs. Margin Scenarios

Growth (%)	Margin (%)	Score	Rating

Summary

Add your revenue growth rate (%) and profit margin (%) to get your Rule of 40 score — a score above 40 signals a balanced, high-performing SaaS business.

How it works

Enter your year-over-year revenue growth rate as a percentage (e.g. 35 for 35% growth).
Enter your profit margin as a percentage — use EBITDA margin or free cash flow margin (negative values are accepted).
The calculator sums the two values to produce your Rule of 40 score.
Scores at or above 40 are considered healthy for SaaS investors; scores below 40 signal imbalance.
Use the breakdown table to see how different growth and margin combinations affect your score.

Use cases

Evaluate SaaS company health before a funding round or due diligence.
Benchmark your business against the Rule of 40 standard used by VCs.
Model scenarios showing trade-offs between growth investment and profitability.
Track Rule of 40 score quarter-over-quarter to spot trend changes.
Compare multiple SaaS companies using a consistent, single-number metric.
Identify whether to prioritize revenue acceleration or margin improvement.

Frequently Asked Questions

Last updated: 2026-07-24 · Reviewed by Nham Vu