The Rule of 40 states that a healthy SaaS company's revenue growth rate plus its profit margin should equal or exceed 40%.
What is Rule of 40?
The Rule of 40 captures the trade-off between growth and profitability in a single number. It lets investors compare a fast-growing, cash-burning company against a slower, profitable one on equal terms.
How to calculate Rule of 40
Worked example
A company growing 30% per year with a 15% EBITDA margin scores 30 + 15 = 45, comfortably above 40. A company growing 60% but burning at −25% margin scores 35 — below the line.
What's a good Rule of 40?
A combined score of 40% or higher is the bar. Elite public SaaS companies often score 50–60%.
Frequently asked questions
Which profit margin should I use?
Commonly EBITDA margin or free-cash-flow margin. Be consistent and state which you use. FCF margin is increasingly the preferred input.
Does the Rule of 40 apply to early-stage startups?
It's most meaningful at scale (roughly $10M+ ARR). Very early companies are expected to prioritize growth over the rule.
Related metrics
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