Rule of 40 Calculator

Type in your year-over-year revenue growth rate and your profit margin, and the calculator adds them into a single Rule of 40 score. Forty points or more is the conventional mark of an efficient software company — one growing fast enough to justify its losses, or profitable enough to justify slow growth. The verdict line tells you which side of the bar you land on. For the margin field, use free cash flow margin or EBITDA margin; either works, provided you use the same one every quarter. Both inputs accept negative values, because plenty of real companies shrink or burn cash, and the score is only honest if the inputs are.

Where the rule comes from

The Rule of 40 is younger than most of the businesses it is used to judge. Venture capitalist Brad Feld gave it a name in a blog post on February 3, 2015, titled "The Rule of 40% For a Healthy SaaS Company." Feld did not claim to have invented it. He wrote that he had heard it at a board meeting from a late-stage investor who described a simple test his firm used: a software company's growth rate plus its profit should add up to 40%. Feld's examples fixed the arithmetic that survives today — growing at 20% means you should be making a 20% profit, growing at 40% means breaking even is fine, and growing at 50% means you can lose 10%.

Feld was explicit that the test was built for scale. His post says the numbers are for "SaaS companies at scale" and tells the reader to assume at least $50 million in revenue, and he pointed sub-scale companies at the T2D3 growth path instead, advising them to reach roughly $1 million in monthly recurring revenue before worrying about the 40% rule at all. That scoping still matters, because the rule assumes a business large enough that its growth rate carries information rather than noise.

Feld's framing spread quickly through venture blogs and board decks, and within a couple of years it had moved from private board meetings into common use. By the late 2010s the sum had migrated further, into public-company earnings calls and sell-side equity research. Bessemer Venture Partners, which describes the Rule of 40 as a metric it helped popularize, tracks it across the constituents of the BVP Nasdaq Emerging Cloud Index, and the large annual surveys of private SaaS companies collect the same two figures every year. When an investor asks whether you clear the rule, this sum is what they mean.

How the score works

score = growth + margin

Both terms are percentages, so a company growing 28% with a 15% margin scores 43. The rule's premise is that the two are interchangeable dollar for dollar: a point of growth is worth exactly as much as a point of margin. That is a deliberate simplification. In strong markets investors have paid far more for growth than for profitability, and in the 2022 derating the premium flipped the other way, yet as a first-pass screen the one-for-one trade has held up better than it has any right to. The score is unbounded in both directions. A company doubling revenue while burning 80% of it scores 20, and a shrinking company with fat margins can still clear 40. Nothing in the arithmetic cares which term supplies the points, and that indifference is the whole design: it puts a cash-burning rocket and a profitable slow-grower on the same axis.

Three companies, three scores

The hypergrowth burner. An $8M ARR infrastructure startup grows 110% year over year while running a free cash flow margin of -55%, spending heavily on sales and burning most of what it raised. Score: 110 − 55 = 55, comfortably above the bar. The rule blesses the burn because the growth pays for it, which is precisely the trade it was invented to sanction. The risk sits in the trend: if growth decelerates to 60% next year while burn only improves to -45%, the score collapses to 15 and the same company is suddenly far below the bar.

The balanced operator. A $40M ARR vertical SaaS company grows 32% with a 9% EBITDA margin. Score: 32 + 9 = 41, just above the bar with neither number doing all the work. Companies in this shape have options — they can lean into either term depending on market conditions — and boards tend to like the profile for exactly that reason.

The cash cow. A $120M ARR incumbent grows 6% but converts 38% of revenue to free cash flow. Score: 6 + 38 = 44, above the bar with barely any growth. This is a mature company harvesting a sticky installed base, and the rule scores it as healthy, which it is — just healthy in a way that private-equity buyers value more than growth investors do.

Which margin to use

The rule's biggest ambiguity is the margin term. Free cash flow margin is the strictest choice and the right one for mature companies: it captures capex, capitalized software development, and working capital swings that EBITDA ignores. EBITDA margin is the most common choice in private-company board decks because it is simple and available monthly. Non-GAAP operating margin shows up in public-company coverage. Any of them can work. What does not work is switching between them — FCF and EBITDA margins routinely differ by ten points or more for the same company, which is a quarter of the entire benchmark. Pick the definition that matches your stage, write it on the slide, and keep it.

What normal looks like and where the rule breaks

Forty is aspirational, not typical. Across public software indices the median score has sat in the low-to-mid 30s in stronger years and slid well below that through the 2022-to-2024 derating, which means most public software companies — businesses solid enough to be listed — miss the bar in most years. Studies of large panels of software companies have likewise found that clearing the rule in any given year is the exception rather than the norm, and clearing it several years running is rarer still. Bessemer's own reading of its cloud index put the average Rule of 40 at about 31 as of late 2023, with top-decile cloud businesses around 48. On those figures, 40 is not the middle of the distribution but a good way above it, and a sustained score of 60 is exceptional rather than the mark of a merely strong company.

The rule also has a floor below which it stops meaning anything. Growth percentages off a tiny base are noise: a company going from $200k to $600k ARR posts 200% growth and a spectacular score while proving nothing about durability. Most practitioners do not apply the rule below roughly $1M ARR, and it becomes genuinely informative somewhere past $10M, where the growth rate reflects a repeatable motion rather than three lucky deals. Even that is far below the $50 million revenue bar Feld set in the original post, which is worth remembering whenever a seed-stage deck quotes a Rule of 40 score as though it settled something. The score can also be gamed in the short run — cutting sales and marketing lifts margin immediately while the lost growth arrives two or three quarters later, so a rising score paired with decelerating growth deserves suspicion rather than applause.

The one-for-one weighting has drawn the sharpest criticism. On January 2, 2024, Bessemer's Byron Deeter and Sam Bondy published a "Rule of X" that multiplies the growth rate before adding free cash flow margin — about two times for private companies and two to three times for public ones — arguing that equal weighting is flawed because compounding growth is worth more than an equivalent point of current profit. They also note that the right multiplier drifts with market conditions and company stage, which is a fair warning about any fixed weighting, including the original 40. Whether or not you adopt that adjustment, the lesson is the same: read the score as a trend across quarters, weighed against the mix of growth and margin behind it, never as a single snapshot.

The Rule of 40 is a screening heuristic, not valuation or investment advice, and no single score summarizes a business. See the site disclaimer.

Frequently asked questions

Is a Rule of 40 score of 35 good?

It misses the classic bar but beats roughly half of public software companies, since the median across public SaaS indices has sat near 30 to 35 in recent years. Direction matters more than the level at that range: 35 and climbing reads very differently from 35 on the way down from 50.

Should I use EBITDA margin or free cash flow margin for the Rule of 40?

Free cash flow margin is the better measure for mature companies because it counts capex and working capital, while EBITDA margin is the common choice in private board decks because it is simple and available monthly. The two can differ by ten points or more for the same business, so pick one and use it every quarter.

What is the Rule of 40 score for a company growing 60% with a -25% margin?

60 plus -25 gives a score of 35, which lands in the close-but-under band. The company is burning a quarter of its revenue, and the rule accepts that as long as growth compensates — at 65% growth the same burn would clear the bar at exactly 40.

Does the Rule of 40 work for a startup under $1 million ARR?

Not usefully. Growth percentages off a small base are noise — moving from $150k to $450k ARR is 200% growth and posts a spectacular score without proving anything repeatable. Most investors start applying the rule around $1M ARR and only weight it seriously past $10M.

Who invented the Rule of 40?

Venture capitalist Brad Feld popularized it in a February 2015 blog post, crediting a late-stage investor who used the screen at board meetings. It spread through venture blogs and board templates within a couple of years and is now a standard line in SaaS equity research and private-company surveys.

Can a company with negative growth pass the Rule of 40?

Yes. Revenue shrinking 5% with a 48% free cash flow margin scores 43, a profile some private-equity-owned software companies actually run. The rule treats growth and margin as interchangeable, so it has no opinion about which side the points come from.