Rule of 40 Calculator

Add your revenue growth rate and profit margin to get your Rule of 40 score, see how far you are from 40, and what growth or margin would close the gap.

Last updated October 2026 · Formula, worked example and sourced benchmarks below

Calculate Your Rule of 40 Score

Which profit margin do you use?

Revenue Growth Rate (year over year)

ARR or revenue growth over the last 12 months

EBITDA Margin

Profit as a share of revenue for the same 12 months. Use a minus sign for losses.

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The Formula

Rule of 40 Score = Growth Rate % + Profit Margin %

The Rule of 40 balances growth against profitability. A fast-growing company can lose money and still pass, and a slow-growing one can pass by being very profitable. What matters is the sum.

How the Calculator Rates Your Score

40 or higher – Meets the rule

Growth and profit together clear the bar.

26–40 – Below 40, above the public median

Short of the rule, but ahead of the typical public SaaS company in 2026.

0–26 – Below the median

Growth, margin or both need work.

Below 0 – Losses outweigh growth

The company is losing more than it is growing.

The 26 mark is the median score of public SaaS companies in Q2 2026, reported by Aventis Advisors. More benchmarks below.

How to calculate the Rule of 40

The Rule of 40 says a software company's revenue growth rate plus its profit margin should add up to at least 40%. Brad Feld popularized it in a 2015 blog post, attributing it to a late-stage investor: "your growth rate + your profit should add up to 40%". Three steps:

Pick a growth rate. Year-over-year revenue or ARR growth: (this year's revenue - last year's revenue) / last year's revenue. See revenue growth rate.
Pick a profit margin. EBITDA margin, free cash flow margin or operating margin, each calculated as profit divided by revenue for the same twelve months.
Add them as percentage points. A negative margin is subtracted.

Rule of 40 score = Revenue growth rate (%) + Profit margin (%)

Definitions vary. Feld's post preferred EBITDA. The Benchmarkit 2025 report uses year-over-year ARR growth plus free cash flow margin and accepts EBITDA as a proxy. Bessemer calls ARR growth plus FCF margin its "efficiency score". Pick one definition and keep it.

Worked example

A SaaS company grew ARR from $5.0M to $6.4M over the last year and ran an 8% EBITDA margin.

Growth rate: ($6.4M - $5.0M) / $5.0M = 28%
Rule of 40 score: 28 + 8 = 36, four points short
To reach 40 at an 8% margin: grow 32%
To reach 40 at 28% growth: run a 12% margin

The same score can describe very different companies. A business growing 60% with a -15% free cash flow margin scores 45 and passes, and so does one growing 10% with a 30% margin. The rule tells you whether the balance is healthy, not which mix is right for your stage.

Annual vs quarterly inputs

Use twelve-month figures for both inputs: year-over-year or trailing twelve-month growth, and the margin over the same twelve months. Annualizing one strong quarter can exaggerate growth badly, and a margin from a single quarter can be distorted by one-off costs or a big annual invoice run.

Free cash flow is especially sensitive to billing terms. When customers prepay annually, cash arrives before the revenue is recognized, so FCF margin can look better than EBITDA margin in a year when you sign many annual deals. Note which margin you used when you compare scores over time.

Common Rule of 40 mistakes

Mixing periods. Quarterly growth plus annual margin, or the other way round, produces a meaningless number.
Switching margin definitions to flatter the score. Moving from EBITDA to FCF in a strong collections year is not improvement.
Counting acquired revenue as growth. Revenue from an acquisition inflates growth without telling you anything about the core business.
Applying it too early. Growth from a small base swings wildly. The Benchmarkit 2025 report notes that VC firms start using the Rule of 40 at around $15M ARR.
Ignoring the source. A score of 40 built on shrinking margins and a score of 40 built on improving retention are not the same. Look at what moved.

What's a good Rule of 40 score?

40 or more meets the rule by definition. In practice, few companies get there:

Benchmark	Value	Source
Median score, public SaaS, Q2 2026	26%	Aventis Advisors
Public SaaS companies at 40 or more, Q2 2026	7 of 46 (15%)	Aventis Advisors
Private SaaS companies meeting the rule	15% in 2023, over a third in 2021	KeyBanc and Sapphire Ventures
Efficiency score target (ARR growth + FCF margin)	70% at $25–50M ARR, 50% at $100M+ ARR	Bessemer, 2021

Aventis Advisors describes the median public SaaS company in Q2 2026 as pairing 11.8% revenue growth with a 14.6% profit margin. The KeyBanc Capital Markets and Sapphire Ventures survey of private SaaS companies found that only 15% met the Rule of 40 in 2023, compared with over one third in 2021. Bessemer's efficiency score targets come from its own high-growth cloud portfolio and set a higher bar than the rule itself.

The rule matters because investors price it. Companies that combine growth with profit tend to earn higher revenue multiples, which you can explore with the SaaS valuation calculator.

How this calculator works

Score is growth rate plus profit margin. The margin type you choose only changes the labels; the math is the same.
Gap to 40 is the score minus 40, shown as points short or points above.
Growth needed is 40 minus your margin. Margin needed is 40 minus your growth rate.
The verdict is green at 40 or above, yellow from 26 (the Q2 2026 public SaaS median) to 40, orange from 0 to 26 and red below 0.
Limitations: the score is a snapshot of twelve months. It does not show how you got there, and for early-stage companies it is mostly noise. The math runs in your browser.

Rule of 40, the full guide including how to use it in planning
Revenue growth rate, free cash flow and operating margin, the inputs
Burn multiple and capital efficiency, other ways to weigh growth against cash

See whether your growth itself is efficient with the SaaS quick ratio calculator.

More free SaaS calculators

See all free SaaS calculators or browse the SaaS Academy for definitions of every metric.

Frequently asked questions

How do you calculate the Rule of 40?

Add your year-over-year revenue growth rate and your profit margin, both in percent. A company growing 28% with an 8% EBITDA margin scores 28 + 8 = 36, four points short of 40. A company growing 60% with a -15% margin scores 45 and passes.

Which profit margin should I use for the Rule of 40?

EBITDA margin and free cash flow (FCF) margin are the most common. Brad Feld's 2015 post that popularized the rule preferred EBITDA, while the Benchmarkit 2025 report uses free cash flow margin and accepts EBITDA as a proxy. Pick one definition, write it down and use it every time.

What is a good Rule of 40 score?

40 or higher meets the rule, and few companies do. Aventis Advisors found a median score of 26% among public SaaS companies in Q2 2026, with only 7 of 46 companies (15%) reaching 40. The KeyBanc and Sapphire Ventures survey found only 15% of private SaaS companies met it in 2023.

Can a company with a negative profit margin pass the Rule of 40?

Yes. A company growing 70% with a -20% margin scores 50 and passes. The rule allows fast-growing companies to lose money, as long as growth more than makes up for the losses.

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

Not very well. Early growth rates from a small base swing wildly, and margins are usually deeply negative while the company builds. The Benchmarkit 2025 report notes that VC firms start using the Rule of 40 as an investment and valuation factor at around $15M ARR.

Should I use ARR growth or revenue growth?

Either works if you are consistent. Recurring-revenue businesses often use ARR growth because it ignores one-off services and timing effects; finance teams and public companies usually use recognized revenue growth. Use annual or trailing twelve-month figures for both growth and margin.

Sources

Brad Feld, Feld Thoughts: The Rule of 40% For a Healthy SaaS Company (February 2015)
Aventis Advisors: SaaS Valuation Multiples: 2015-2026 (August 2026)
KeyBanc Capital Markets and Sapphire Ventures: Private SaaS Company Survey press release (December 2023)
Benchmarkit and Pavilion: 2025 B2B SaaS Performance Metrics Benchmarks (May 2025)
Bessemer Venture Partners: Scaling to $100 Million (September 2021)

Benchmarks change as markets move. Each figure on this page is quoted with the publisher and date of the data so you can judge how current it is.

Track the growth side automatically

GrowPanel's subscription analytics tracks ARR growth, retention and every MRR movement from your billing data, so the growth half of your Rule of 40 is always up to date.

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