A rule of thumb that a healthy SaaS company's revenue growth rate plus its profit margin should add up to at least 40.
Rule of 40 score = revenue growth rate (%) + profit margin (%) — aim for 40 or higher
A company growing ARR 35% year over year while running a 10% EBITDA margin.
35 + 10 = 45 — comfortably above the 40 line
The Rule of 40 folds the two forces that pull against each other in a subscription business — growth and profitability — into a single score. Add your revenue growth rate to your profit margin, both as percentages, and the total should reach 40 or more. Investor Brad Feld popularised it in 2015, and it has since become the shorthand boards reach for to judge whether a company is balancing the two well.
The logic is that growth and margin trade off. Early on you spend to grow, so a negative margin is acceptable if growth is high. Later, growth slows and you bank profit instead. A company growing 60% while burning at a −20% margin scores 40, and so does one growing 20% at a 20% margin — different stages, identical balance.
The number only means something once you state which margin you used. EBITDA and free cash flow are the usual choices, and they can land the same company on opposite sides of the line, so always pair the score with its basis.
The Rule of 40 is the fastest read on whether your growth is worth its cost. It lets a board compare a cash-burning rocket and a steady profit-maker on equal footing, and clearing it pays off directly: companies that consistently pass tend to trade at materially higher revenue multiples than those that don't.
40 is the pass mark, and only a minority clear it — roughly 15–30% of public SaaS companies in recent years on an EBITDA basis. Most early-stage companies are too volatile to judge by it, so it matters most past about $10M ARR.
EBITDA margin and free-cash-flow margin are the two common choices, and they can disagree sharply — far more companies pass on an FCF basis because annual contracts collect cash upfront. Pick one, state it, and use it consistently. Our full Rule of 40 guide works through both.
Not well. Below roughly $10M ARR, growth swings too hard quarter to quarter for the score to mean much. Early-stage founders are better judged on burn multiple and quick ratio, then graduate to the Rule of 40 around Series B or C.
Connect your Stripe account and see your real MRR, churn, and LTV in real time — on desktop and mobile.
No credit card required · Connect Stripe in 1 click
No credit card required. Connect Stripe in 1 click.
We're building iOS and Android apps that'll bring your metrics everywhere.
Our mobile apps are currently in active development. Follow us on social media for updates and be the first to know when they launch.