Free Rule of 40 calculator

Rule of 40 calculator

Check whether growth and profitability together clear 40%, and see what it would take to get there.

Growth and profitability

Calculate your Rule of 40 score

Add revenue growth and profit margin for the same period. Negative margins are allowed.

How the Rule of 40 calculator works

This Rule of 40 calculator adds two percentages for the same period:

  • Rule of 40 score = revenue growth rate % + profit margin %
  • Margin needed = 40 − growth rate
  • Growth needed = 40 − profit margin

Profit margin can be negative. A company growing 60% a year with a −15% EBITDA margin scores 45%; a company growing 10% with a 20% margin scores 30%.

Where the Rule of 40 comes from

Brad Feld described the rule in “The Rule of 40% For a Healthy SaaS Company” (February 2015), attributing it to a late-stage investor he heard at a board meeting: your growth rate plus your profit should add up to 40%. Feld noted that profit is the harder part to define and said he preferred EBITDA, and suggested measuring growth as year-over-year growth in monthly recurring revenue.

Because the original did not fix a profit measure, people now calculate it with EBITDA margin, operating margin, or free cash flow margin. The calculator lets you label which one you used; the arithmetic is the same.

Interpreting your score

  • At or above 40%: growth and profitability together clear the threshold. Check that the growth is durable and the margin is not flattered by deferred costs.
  • Below 40%: the gap shows how many points of growth or margin are missing. Cutting costs raises margin immediately; raising growth usually takes longer and may cost margin first.

The score is a summary, not a diagnosis. Use it with the LTV and CAC calculator, net revenue retention, and runway. For how growth and profitability feed into price, see the ARR multiples guide.

Common mistakes

  • Mixing periods, such as monthly growth with an annual margin.
  • Counting one-time revenue in growth while using recurring revenue elsewhere.
  • Switching profit measures between periods to improve the score.
  • Applying the rule to a very young product where small numbers dominate.

Frequently asked questions

What is the Rule of 40?

The Rule of 40 says a SaaS company's growth rate plus its profit margin should add up to at least 40%. Brad Feld popularized it in a February 2015 blog post, attributing it to a late-stage investor.

Should I use EBITDA or free cash flow margin?

The original description does not specify a profit measure; Brad Feld said he preferred EBITDA. Many investors use free cash flow margin instead because it reflects cash. Pick one, say which one you used, and stay consistent over time.

Which growth rate should I use?

Use year-over-year revenue growth for the same period as the margin. Feld suggested year-over-year growth in monthly recurring revenue. Do not mix a monthly growth rate with an annual margin.

Does the Rule of 40 apply to early-stage startups?

It is mainly used for established SaaS companies. Early products can post very high growth rates from a small base, or deeply negative margins while investing, so the score swings widely and says little on its own.

Is a score above 40% good enough?

It suggests growth and profitability are reasonably balanced, but it is a heuristic. Two companies at 40% can be very different: one growing 40% at breakeven, the other flat with 40% margins. Look at retention, unit economics, and runway too.

Sources and further reading