Rule of 40 Calculator

The Rule of 40 formula

Rule of 40 = YoY revenue growth rate (%) + profitability margin (%). A score of 40 or higher signals a SaaS business that balances growth and profitability well. You can clear it three ways: grow fast at a loss, grow modestly while highly profitable, or anything in between. A company growing 25% with a 20% EBITDA margin scores 45, it passes. One growing 20% while burning 15% scores 5, it fails.

Worked example: 30% growth at a 15% EBITDA margin

A SaaS company growing ARR 30% a year with a 15% EBITDA margin, measured against the Rule of 40:

Which profit margin should you use?

The growth input is settled, year-over-year ARR (or recurring revenue) growth. The profit input is where it gets debated, and your choice materially changes the score:

• EBITDA margin, the practical default for private SaaS. Easy to compute and widely reported, but can be flattered by adjustments.
• Free cash flow (FCF) margin, favoured by many institutional investors because it reflects real cash generation and is hardest to game.
• Operating or net margin, stricter, GAAP-based alternatives used for cross-sector comparison.

Pick one and stay consistent over time, switching between EBITDA and FCF will rank the same company differently, especially if it's capital-intensive.

What's a good Rule of 40 score?

40+ is healthy; 50+ is top-quartile; 60+ is elite (top-decile). Context matters, though: the median SaaS company scores around 35 (KeyBanc, 2025), and only about a third clear 40 in a typical year, yet those that do command markedly higher valuation multiples (Bessemer, 2024). The metric is most meaningful from Series B onward; at seed and Series A, focus on unit economics (CAC, LTV, gross margin, net retention) instead, since high growth with deeply negative margins can "pass" while masking weak fundamentals.

Rule of 40 vs Rule of 50 vs Rule of X

As more SaaS companies clear 40, investors increasingly talk about a Rule of 50, the same growth-plus-margin sum, but with the bar raised to 50 to separate genuinely top-tier operators from the merely healthy. The Rule of X is a different formula, not a different bar. Bessemer Venture Partners proposed it in January 2024: Rule of X = growth rate × multiplier + FCF margin, with a multiplier of "~2x for private companies and ~2-3x for public companies". Bessemer's reasoning is that a point of growth is worth more to a cloud company's valuation than a point of margin; for public cloud businesses it put that ratio at 2.3x. Its late-2023 benchmarks: the BVP Cloud Index averaged about 31 on the Rule of 40 and about 50 on the Rule of X, and the top decile about 48 and 80. Set the multiplier in the calculator above to see your score. For early-stage companies Bessemer itself points to burn multiple and the path to FCF break-even instead.

The formula never changes, it's always growth% + margin%. Only the pass line moves. Use the threshold switch in the calculator above to test your score against 40, 50, or a custom target, and see how much extra growth or margin you'd need to clear the higher bar.