Rule of 40 Calculator

What Is the Rule of 40?

The Rule of 40 is a SaaS benchmark that says a healthy software company's annual revenue growth rate plus its profit margin should equal or exceed 40%. Coined by Brad Feld in 2015 and popularized by Bessemer Venture Partners, it captures the trade-off between growth and profitability in one number. A company growing 60% with a -20% margin scores 40. A company growing 10% with a 30% margin also scores 40. Both are considered healthy by Rule of 40 logic.

Which Profit Margin to Use

The most common margin used is EBITDA margin, since it strips out non-cash charges and capital structure. Free Cash Flow (FCF) margin is the strictest test and what late-stage investors prefer. Net income margin is rarely used because it includes one-time items and stock-based compensation. This calculator lets you switch between EBITDA, FCF, and net margin so you can present whichever number is most defensible to your board or investors.

Rule of 40 Benchmarks by Stage

Public SaaS companies in the SaaS Capital Index averaged a Rule of 40 score of 31 in 2024, with the top quartile above 50. Private growth-stage SaaS targets are typically: Seed/Series A — 60+ (high growth, deep losses are acceptable); Series B/C — 50; Series D and beyond — 40. Public companies — 40+. A score below 20 signals fundamental issues and usually leads to valuation multiple compression at the next round.

Why Investors Care

The Rule of 40 correlates with revenue multiple. Bessemer's State of the Cloud research shows that public SaaS companies above the rule trade at roughly 2x the revenue multiple of those below. For founders, a higher score means cheaper capital, friendlier term sheets, and stronger negotiating leverage in M&A. For operators, it forces honest trade-offs between burn-fueled growth and capital efficiency in a higher-rate environment.

How to Improve Your Score

To raise your score, attack whichever side has more room. If growth is below 30%, focus on net revenue retention, expansion motion, and pricing. If margin is deeply negative, audit headcount efficiency, sales productivity (Magic Number), and CAC payback. Cutting unprofitable customers or geographies often raises the score by improving both numbers at once. Most companies cannot dramatically raise both growth and margin in the same year — pick one, defend the other.

Sources: Brad Feld (2015), Bessemer Venture Partners State of the Cloud, SaaS Capital Index 2024. Last updated: April 2026.