Free tool
Rule of 40 Calculator for SaaS Companies
The Rule of 40 says a SaaS company's revenue growth rate plus its profit margin should add up to at least 40%.
Use this free rule of 40 calculator to get your score from growth and EBITDA or free cash flow margin, see how far you are from 40, and find the margin you would need at your current growth.
Calculate your Rule of 40 score
Enter your year-over-year revenue growth and your profit margin. Negative numbers are fine.
Don’t know your percentages? Work them out from revenue
Enter your growth rate and EBITDA margin to see your score.
What margin would I need at my growth rate?
Enter a growth rate above to see the margin you would need.
What is the Rule of 40?
What is the Rule of 40 formula?
Rule of 40 score = Revenue growth rate (%) + Profit margin (%)
- Revenue growth rate = (this year's revenue − last year's revenue) ÷ last year's revenue × 100. Use year-over-year revenue or ARR growth.
- Profit margin = EBITDA (or free cash flow) ÷ revenue × 100. A loss gives a negative margin.
- A score of 40 or more passes. Below 40, the gap tells you how many points of growth or margin are missing.
Brad Feld's original post gave three examples that all land on 40: 20% growth with a 20% profit, 40% growth at break-even, and 50% growth with a 10% loss.
What does the Rule of 40 mean?
The Rule of 40 means growth and profit can be traded against each other, but only so far. A company can spend its margin to grow faster, or grow slower and keep more profit. The rule says that every point of growth you give up should come back as a point of margin, and the two together should reach 40.
A score above 40 suggests growth is being bought efficiently. A score below 40 does not mean a company is failing; it means the investor will ask whether the losses are buying enough growth, or whether a slower company is profitable enough.
Where does the Rule of 40 come from?
Venture capitalist Brad Feld popularised it in a February 2015 blog post. He heard it at a board meeting from a late-stage investor, whose firm used it as a test of a healthy software company: “your growth rate + your profit should add up to 40%.” Fred Wilson, who was at the same board meeting, wrote it up on his blog AVC the same month as “your annual revenue growth rate + your operating margin should equal 40%.” Bain & Company says venture investors first used it to quickly assess small, fast-growing companies.
How many software companies pass the Rule of 40?
Fewer than you might think, and fewer still year after year. Bain & Company studied 124 public software companies and found 40% of them beat the Rule of 40 in 2017. Across 86 companies from 2013 to 2017, only 25% beat it for three or more years, and only 16% beat it in all five.
Which profit margin should you use for the Rule of 40: EBITDA or free cash flow?
There is no single official margin. Brad Feld prefers EBITDA, and Bain & Company notes that most analysts use EBITDA, though some have proposed free cash flow, EBIT or net income instead. Pick one, say which one you used, and use the same one every time you compare.
| Margin | What it measures | When to use it | Who uses it |
|---|---|---|---|
| EBITDA margin | Profit before interest, tax, depreciation and amortisation, as a % of revenue. | Comparing operating performance with other companies; the most common choice. | Brad Feld; Bain & Company, which notes most analysts use it. |
| Free cash flow margin | Cash from operations minus capital spending, as a % of revenue. | When cash matters most, or when annual prepayments make cash and profit differ. | Some analysts, as an alternative to EBITDA. |
| Operating margin | Operating profit (after depreciation) as a % of revenue. | When it is the profit figure your board already reports. | Fred Wilson's 2015 wording of the rule. |
What does a Rule of 40 calculation look like?
Five companies with very different shapes. Three pass with completely different mixes of growth and profit; two fall short.
| Company | Revenue growth | Profit margin | Rule of 40 score | Result |
|---|---|---|---|---|
| Fast-growing, loss-making | 60% | -20% | 40 | Passes |
| Balanced | 25% | 15% | 40 | Passes |
| Mature and profitable | 10% | 35% | 45 | Passes |
| Growing, still burning cash | 20% | -10% | 10 | Short by 30 |
| Shrinking but profitable | -5% | 30% | 25 | Short by 15 |
How much does the Rule of 40 matter at each stage?
The same score means different things at different sizes. Brad Feld framed the rule for SaaS companies at scale, with at least $50 million in revenue, while Bain & Company says venture investors first used it on small, fast-growing companies. The table below is our own rule of thumb for reading it.
| Stage | How much the score tells you | What to watch instead, or as well |
|---|---|---|
| Very small revenue base | Little. One new customer can move growth by tens of percent. | Growth, retention, and how long your runway lasts. |
| Early growth | A useful trend line; heavy losses are normal if growth is fast. | Whether the score is rising, and what each dollar of burn buys in new revenue. |
| Scaling, later rounds | A benchmark worth tracking every year. | Whether you can stay near 40 as growth slows and margin has to take over. |
| At scale ($50M+ revenue) | The size Brad Feld framed the rule for. | Staying above 40 year after year, not just once. |
Does the Rule of 40 apply to early-stage startups?
Yes, but read it as a direction of travel, not a pass mark. On a very small revenue base, a single new customer can add tens of points of growth, so the score jumps around from one year to the next and says little about the business on its own.
What are the limits of the Rule of 40?
- It is a rule of thumb: the line at 40 is a convention, not a law of economics.
- It is a snapshot of one year. A single big contract or one-off cost can move it a long way.
- It ignores the quality of growth: churn, retention and how growth was bought do not show up.
- Scores are only comparable when both companies use the same margin and the same growth measure.
Rule of 40 FAQs
The Rule of 40 says a software company's revenue growth rate plus its profit margin should add up to 40% or more. A company growing 30% a year with a 10% EBITDA margin scores 40 and passes; one growing 10% with a 15% margin scores 25 and falls short.
It means growth and profit can be traded against each other, but not without limit. A fast-growing company may run at a loss, and a slow-growing one should be profitable. The Rule of 40 sets the line: every point of growth you give up should come back as a point of margin, and the two together should reach 40.
Add your year-over-year revenue growth rate to your profit margin. Growth = (this year’s revenue − last year’s revenue) ÷ last year’s revenue × 100. Margin = EBITDA (or free cash flow) ÷ revenue × 100. For example, 60% growth and a −20% margin gives a score of 40.
It was written for software companies. Brad Feld’s February 2015 post described it as a rule for a healthy software company, including SaaS. You can run the sum for any business with recurring revenue, but the 40 line assumes software-like gross margins, so it says less about low-margin businesses such as hardware or services.
A score of 40 or more passes, and a higher score is better. Staying above 40 year after year is rare: in Bain & Company’s study of 86 public software companies from 2013 to 2017, only 16% beat the Rule of 40 in all five years.
Either works if you say which one you used and stick with it. Brad Feld and Bain & Company use EBITDA, and Bain notes that most analysts do, though some have proposed free cash flow, EBIT or net income instead. Free cash flow is closer to the cash in the bank; EBITDA is easier to compare between companies.
Sources differ. Brad Feld framed it for SaaS companies at scale, with at least $50 million in revenue, while Bain & Company says venture investors first used it to quickly assess small, fast-growing companies. On a very small revenue base one new customer can move growth by tens of percent, so the score swings a lot and is best read as a trend, not a pass mark.
Yes. A company growing 60% a year with a −20% margin scores exactly 40. That is the point of the rule: losses are acceptable when growth is fast enough to make up for them.
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