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★ Is the balance of growth and profit healthy?

Rule of 40 Calculator

Check your SaaS company against the Rule of 40: revenue growth rate plus profit margin. Free calculator with the formula and when the rule applies.

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  • No signup
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EBITDA or free cash flow margin. Negative if losing money.

Your Rule of 40

25

Below 40

  • 15 points short. Either growth or margin has to improve by that much.

Rule of 40 score = revenue growth rate (%) + profit margin (%)

Rule of 40: 25.

Growth or margin: pick one to fix first. I help teams ship the product work behind either.

Let's talk
01

How it works

Rule of 40 score = revenue growth rate (%) + profit margin (%)

Add your annual revenue growth rate and your profit margin. A company growing 50% while losing 10% scores 40. So does one growing 20% at a 20% margin.

The point is the trade-off: fast growth justifies losses, and slower growth needs to be paid for with profit.

02

Worked example

A company growing revenue 35% a year while running at a −10% margin.

Rule of 40 worked example
InputValue
Revenue growth (year over year)35.0%
Profit margin-10.0%
Rule of 4025

That lands in the below 40 band. Change any input above to run your own numbers.

03

Benchmarks

Brad Feld popularized the rule in 2015, after hearing it from a late-stage investor: growth rate plus profit should be 40% or more. It was meant for companies at scale, so early-stage startups below it are not necessarily in trouble.

Rule of 40 benchmark bands
Rule of 40Reading
40 and abovePasses the Rule of 40
under 40Below 40

Source: Brad Feld, The Rule of 40% for a Healthy SaaS Company.

04

How to improve it

  • If growth is the weak side: fix retention first, then pricing, then acquisition.
  • If margin is the weak side: cut costs that do not support growth or retention.
  • Reduce infrastructure and support cost per customer to lift gross margin.
  • Keep headcount growth slower than revenue growth.
05

Questions founders actually ask

Which profit margin should I use?
Most use EBITDA margin or free cash flow margin. Be consistent and say which one you used, because the score changes depending on the choice.
Does the Rule of 40 apply to early-stage startups?
Not really. It was framed for companies at scale. A seed-stage startup can grow 200% at a deeply negative margin, and the score tells you little.
Can a company pass with negative margins?
Yes, if growth is high enough. 60% growth with a −20% margin scores 40.
Should growth be ARR or revenue?
Either, as long as it is year over year. ARR growth is more common for subscription businesses.
06

Related metrics

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07

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Fine print

Tools: on the house.
Engineer: by the hour.

Moving them is the expensive part, and the part I'm good at: activation flows, upsell moments and the product work behind better numbers.

I'm Himanshu, an AI and full-stack engineer. I build MVPs, AI agents and the growth plumbing around them for early-stage startups.

Hire me →My projects