Rule of 40 Calculator

What Is the Rule of 40 — and Why Investors Check It First

The Rule of 40 says a healthy SaaS company's revenue growth rate plus its profit margin should total 40% or more. It is the standard shorthand for the growth-versus-profitability trade-off: you can burn cash if you are growing fast enough, or grow slowly if you are printing margin — but the two together have to clear the bar. Popularized by Brad Feld and adopted by Bessemer and most growth-stage investors, it shows up in nearly every SaaS board deck and fundraising screen for companies past roughly $1M ARR.

The Formula, With a Worked Example

Rule of 40 = revenue growth % + profit margin %

Say ARR grew from $8.0M to $10.4M over the last twelve months — 30% growth. Over the same period you generated $1.2M of free cash flow on $10M of recognized revenue, a 12% FCF margin. Score: 30 + 12 = 42%. Passes. Now flip it: a company growing 55% while burning at a −20% FCF margin scores 35% and misses, despite the flashier growth number. That is exactly the discipline the metric enforces.

Some investors use a weighted variant — commonly 1.33 × growth % + 1.0 × margin % — on the logic that the market has historically paid more for growth than for margin. A 30%-growth, breakeven company scores 30 unweighted but 40 weighted. The calculator handles both.

What's a Good Rule of 40 Score?

Unlike retention metrics, the bar barely moves by stage — 40% is the line whether you are bootstrapped or Series B. These bands are directional 2026 medians synthesized from public SaaS benchmark reports:

Context matters: in most years the median public SaaS company sits in the low-to-mid 30s, so clearing 40 puts you in the upper tier, not the middle of the pack. See how your other efficiency metrics stack up by stage on the benchmarks page.

Common Mistakes That Distort the Score

• Mixing margin definitions. FCF margin, EBITDA margin, and GAAP operating margin can differ by 15+ points for the same company. FCF margin is the most common institutional choice — pick one and hold it every period.
• Annualizing one hot month. Use trailing-twelve-month or full-quarter year-over-year growth, not a single month's MRR jump multiplied by twelve.
• Applying it too early. Below ~$1M ARR, percentage growth is noise and investors expect you to run at a loss; the metric starts to matter from Series A onward.
• Treating 40 as a gate in isolation. A 38 with an improving Magic Number and a healthy Quick Ratio reads very differently from a 38 with deteriorating sales efficiency. And if you are below the line and burning, check your burn rate and runway before deciding which lever to pull — cutting spend and reaccelerating growth are very different plans.