Rule of 40 Calculator
Check whether growth and margin together reach 40%.
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EBITDA or free cash flow margin. Use a minus sign for a loss, for example -15.
Rule of 40 score
points to go
Enter a growth rate (or both revenue figures) and a profit margin.
Formula
Score = revenue growth rate + profit margin, with growth = (this year − last year) ÷ last year.
Growth and margin against the Rule of 40
Anything above the dashed line scores 40 or more.
Related: MRR & ARR Calculator, Churn Rate & Retention Calculator
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The formula
Rule of 40 score = revenue growth rate (%) + profit margin (%)
A score of 40 or more meets the rule. Growth is usually year-over-year revenue or ARR growth. For the margin, most people use EBITDA margin or free cash flow margin; pick one and keep it the same each time you measure.
If you do not have the growth rate, switch to "From revenue" and enter revenue for the last 12 months and the 12 months before. Growth is then (this year − last year) ÷ last year.
Worked example
| Input | Value |
|---|---|
| Revenue, last 12 months | $2,600,000 |
| Revenue, 12 months before | $2,000,000 |
| Profit margin | 12% |
- Growth: ($2,600,000 − $2,000,000) ÷ $2,000,000 = 30%.
- Score: 30% + 12% = 42.
- 42 is at least 40, so the company meets the Rule of 40.
How to read it
The rule is a quick check of whether a software company balances growth and profitability. It accepts very different shapes: 60% growth with a −20% margin scores 40, and so does 10% growth with a 30% margin. In the chart, every point above the dashed line meets the rule.
That flexibility is the point. A fast-growing company can lose money while it invests, and a slow-growing one is expected to be profitable. A company with low growth and losses falls below the line, which is the case the rule is meant to flag.
Common mistakes
- Applying it too early. For a young company growth swings wildly from a small base, so 200% growth and a −150% margin say little. The rule is mostly used once revenue is steady: Brad Feld, whose 2015 post popularized it, wrote it for SaaS companies at scale, around $50 million in revenue.
- Mixing periods. Growth over 12 months with a margin from one good quarter gives a misleading score. Use the same period for both.
- One-off items. A large one-time contract or cost can move the score by many points. Remove it, or note it when you share the number.
- Switching margins. EBITDA margin and free cash flow margin can differ a lot. Changing between them makes the trend meaningless.
To see where your growth comes from, break down this month's change with the MRR & ARR calculator.
Which profit margin should I use?
EBITDA margin and free cash flow margin are the most common. Free cash flow is closer to how much cash the business actually produces; EBITDA is easier to get from monthly accounts. Use one consistently.
Does the Rule of 40 apply to early-stage startups?
Not really. Before revenue is stable, growth rates are too volatile for the score to mean much. Early-stage teams usually focus on growth, retention and payback instead.
Can I use ARR growth instead of revenue growth?
Yes, many companies do, especially when revenue recognition lags behind new contracts. State which one you used when you report the score.
What if my margin is negative?
Enter it with a minus sign, for example −15. A loss-making company can still meet the rule if it grows fast enough: 55% growth with a −15% margin scores exactly 40.
Is meeting the Rule of 40 enough?
No. It is one summary number. Investors also look at retention, gross margin, payback and how efficiently growth is bought.
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