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.

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 — the institutional gold standard (the SaaS Metrics Standards Board, Bessemer and a16z all favour it). 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 roughly 28–35 (KeyBanc, 2025), and only about 11–30% of companies clear 40 — 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.