Rule of 40 Calculator
Add your year-over-year revenue growth rate to your profit margin — the classic health check for SaaS businesses is whether the two together reach 40.
Reviewed by the CalcCafe editorial team · Last updated 18 July 2026 · How we test our tools
Example
Suppose your SaaS business grew revenue 25% year over year and runs a 10% free-cash-flow margin. Rule of 40 score = 25 + 10 = 35 — five points short of the benchmark. To clear 40 you would need to either accelerate growth to 30%+ at the same margin, or expand margins to 15%+ at the same growth. A hyper-growth company at 80% growth and -30% margin scores 50 and passes comfortably, which is exactly the trade-off the rule is designed to allow.
How it works
Rule of 40 score = year-over-year revenue growth rate (%) + profit margin (%). Either component may be negative: a fast-growing money-loser and a slow-growing cash machine can both pass. The conventional threshold is 40 — scores at or above 40 are considered healthy for a software business. This calculator accepts any margin definition you choose, but free cash flow margin and EBITDA margin are the two used in practice; pick one and use it consistently across periods and peers. Empty inputs are treated as 0.
Good to know
The margin definition matters more than most founders realize. The rule was popularized by venture and growth investors (Brad Feld wrote it up in 2015) with free cash flow margin as the profitability term, and FCF remains the strictest and most common choice because it captures capitalized software costs and working-capital reality. EBITDA margin is the frequent alternative and typically flatters the score by several points; non-GAAP operating margin sits in between. Whichever you choose, apply it consistently — a company scoring 42 on EBITDA and 33 on FCF has not passed the rule, it has switched rulers.
Why 40 rather than some other number? It encodes the empirical trade-off investors accept between growth and profitability: a dollar of growth and a dollar of margin are treated as roughly interchangeable, and 40 is about where the top quartile of durable public software companies has historically landed. The trade-off is not perfectly linear in valuation terms — public-market data consistently shows growth is rewarded more than margin at the same Rule of 40 score, which is why variants like the “weighted rule” (growth × 1.3 + margin) and Bessemer’s efficiency score exist. Treat 40 as a screening line, not a valuation formula.
Public comps put the bar in context. In the 2021 peak, dozens of public SaaS companies cleared 40 on growth alone; after the 2022-2023 compression the median public software company scored in the high 20s to low 30s, and the companies still clearing 40 — with a healthy mix of growth and FCF rather than growth alone — earned a durable multiple premium. The composition of the score has also shifted: markets now prefer 20% growth + 20% margin over 45% growth + -5% margin, because margin-led scores are more resilient when growth decays.
The rule breaks down at small scale, and it is worth being honest about that. A $2M ARR startup growing 100% from a tiny base with -60% margins scores 40 but proves nothing about efficiency — early-stage growth rates are cheap and noisy. Most practitioners only apply the rule meaningfully from roughly $10-20M ARR upward, once growth reflects repeatable go-to-market rather than founder-led sales. Below that scale, burn multiple and net revenue retention are far more diagnostic; the Rule of 40 becomes the right lens as a company approaches growth-stage fundraising or IPO readiness.
Frequently asked questions
Which profit margin should I use in the Rule of 40?
Free cash flow margin is the most common and strictest choice; EBITDA margin is a frequent alternative that usually flatters the score by a few points. Whichever you pick, use the same definition across all periods and when comparing against other companies — mixing definitions makes the score meaningless.
Why is the threshold 40 and not some other number?
It encodes the growth-versus-profit trade-off investors historically accepted: growth percent plus margin percent around 40 is roughly where the top quartile of durable public software companies has landed. It is a screening heuristic, not a law — public data shows growth is actually rewarded somewhat more than margin at the same score.
Can a company with negative margins pass the Rule of 40?
Yes. A company growing 60% with a -15% FCF margin scores 45 and passes. The rule exists precisely to permit that trade — though since 2022, markets have preferred balanced scores (say 20% growth + 20% margin) over growth-only scores, because margin-led scores hold up better when growth decays.
Is my data uploaded anywhere?
No — this calculator runs entirely in your browser. Your growth and margin figures never leave your device, and the page keeps working offline once loaded. It is completely free with no sign-up.
People also ask
Does the Rule of 40 apply to early-stage startups?
Not really. Below roughly $10-20M ARR, growth rates off a small base are noisy and cheap, so a passing score proves little. Early-stage investors lean on burn multiple and net revenue retention instead; the Rule of 40 becomes meaningful at growth stage and beyond.
What is a good Rule of 40 score for a public SaaS company?
After the 2022-2023 multiple compression, the median public software company scored in the high 20s to low 30s, so simply clearing 40 puts a company in the top quartile. Companies that clear it with a balanced mix of growth and free cash flow earn the strongest valuation premiums.
How can I improve my Rule of 40 score?
Either reaccelerate growth (pricing, expansion revenue, new segments) or expand margin (gross margin improvements, sales efficiency, infrastructure cost cuts) — but avoid cutting so deep that growth falls faster than margin rises. Improving net revenue retention helps both components at once.
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Sources & references
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