Rule of 40 Calculator
The Rule of 40 is Brad Feld's shorthand for balancing growth against profitability: a healthy SaaS scores 40 or higher on growth plus margin.
The formula
Rule of 40 score equals year-over-year revenue growth (percent) plus profit margin (percent). Passes at 40 or higher.
FAQ
Which margin do I use?+
EBITDA margin is the classic input. Free-cash-flow margin is the version investors increasingly prefer because it exposes deferred cash costs.
Does it apply below $10M ARR?+
Not really. Below scale, most companies choose growth over margin and score below 40. It becomes meaningful past $25M ARR.
Can a shrinking company pass?+
Mathematically yes with a big enough margin. Practically no; investors will ignore the score.
What is the elite band?+
60+ is elite territory. Snowflake and Datadog cleared 70+ at IPO scale.
Where does this fail?+
One-time revenue events (a large multi-year prepay) can inflate growth. Normalize before scoring.