Free Rule of 40 Calculator
Add your revenue growth rate to your profit margin. The result is the SaaS benchmark venture investors use to screen for healthy trade-offs between growth and profitability. Pick your margin definition, see your score, and read what it actually means.
Your inputs
Year-over-year revenue change.
Whichever definition you chose.
Rule of 40 is the heuristic SaaS founders use when prepping board materials, and that finance leads use to benchmark against public SaaS comparables. It's a screen, not a diagnosis: a 45 score with deteriorating growth tells a different story than 45 with improving growth.
The formula
Rule of 40 Score = Growth Rate % + Profit Margin %
Both inputs are signed percentages. If you grow 60 percent and run at a 10 percent operating loss, your score is 50. If you grow 25 percent at a 20 percent EBITDA margin, your score is 45. Both pass the rule. The point of the heuristic is that you should be doing one or the other well enough that they add up. Investors do not care which side carries the weight, only that the sum is healthy.
Rule of 40 is a screening tool, not a verdict. It hides quality issues that matter at scale: net revenue retention, gross margin, sales efficiency, burn multiple. A company can pass the rule and still be a bad business if growth is propped up by discounts or if margins come from cutting R&D investment. Read the score as a starting point, not a conclusion.
How to read your result
Three things separate a useful Rule of 40 read from a vanity number:
- Direction matters more than level. A score of 38 trending up over four quarters is usually a better signal than a score of 50 that has been falling for a year. Investors read the trajectory, not the snapshot.
- Mix matters at scale. Two companies with the same score of 45 are not equivalent. 70 percent growth at negative 25 percent margin is a different business than 15 percent growth at 30 percent margin. The first needs cheap capital; the second prints cash. Investors price these differently.
- Net retention is the silent variable. If your net dollar retention is below 100 percent, a Rule of 40 pass is fragile. Existing customers are leaking faster than new logo growth covers, and that catches up with you in two or three years.
Track your Rule of 40 score alongside the other core SaaS KPIs (MRR, churn, CAC, net retention). clariBI lets you set Rule of 40 as a quarterly target inside Goals and OKRs and alerts the team when the trend shifts.
Industry benchmarks (2026 data)
Benchmarks shift with the macro cycle. Public SaaS multiples compressed in 2022 to 2023 and Rule of 40 became the dominant screen as growth-at-all-costs fell out of favor. The numbers below are synthesized from public SaaS comparables and venture data sets.
| Segment | Rule of 40 score | What it signals |
|---|---|---|
| Top quartile public SaaS | 45 - 60 | Premium revenue multiples, durable demand. |
| Median public SaaS | 25 - 35 | Average market multiple. Most names sit here. |
| Best-in-class (rare) | 60+ | Both high growth and meaningful profit. Usually a category leader. |
| VC-backed private, Series B+ | 25 - 30 minimum | Below this and follow-on capital gets expensive or conditional. |
| Private SaaS at $10M ARR | 30 - 40 (median) | Healthy band. Below 20 raises questions about capital efficiency. |
| Distressed SaaS | Below 0 | Negative growth and negative margins. Restructure conversation. |
Source ranges synthesized from Bessemer State of the Cloud, OpenView SaaS Benchmarks, and Meritech public SaaS comparables. Your score sitting outside these bands is informative, not diagnostic. ACV, geography, and stage move the medians significantly.
FAQ
Why 40 specifically? Why not 30 or 50?
40 became the number because Brad Feld and Fred Wilson surfaced it around 2015 from observed patterns in public SaaS data: companies hitting that combined level tended to trade at premium multiples and survive downturns. It is a heuristic, not a law. Bessemer's data shows the top quartile of public SaaS averages 45 to 50, so 40 is a sensible passing line rather than an outlier.
Which margin should I use: EBITDA, Free Cash Flow, or Operating?
Late-stage and public-market investors prefer Free Cash Flow margin because it is harder to dress up. EBITDA margin is the most common reference in pitch decks. Operating margin is the cleanest GAAP number. Adjusted EBITDA, which strips out stock-based compensation, is what venture-backed early-stage companies typically report. Pick one and label it clearly so anyone reading your score knows what you are claiming.
Does Rule of 40 work for early-stage startups?
Not really. The rule was built on public SaaS data, where revenue is at least $50M and unit economics are stable. A pre-Series A company growing 300 percent with negative 200 percent margins technically scores 100, but that score is meaningless. Below $10M ARR, the Magic Number, burn multiple, and CAC payback are more diagnostic than Rule of 40.
How is Rule of 40 different from Magic Number?
Magic Number measures sales efficiency: new ARR divided by sales and marketing spend. It tells you whether each dollar of go-to-market spend is producing recurring revenue. Rule of 40 measures the trade-off between growth and profitability at the whole-company level. Magic Number is a sales productivity test; Rule of 40 is a portfolio-balance test. Healthy companies pass both.
What if my company is growing 100 percent but burning cash?
If you grow 100 percent at negative 50 percent margins, your score is 50, which passes. Most investors will accept that profile at Series A or B if the burn is funding obvious growth levers. By Series C or D, the same score with worse capital efficiency tends to get penalized. Growth quality (net retention, payback) matters more than the headline number once you scale.
Track Rule of 40 automatically in clariBI
Connect Stripe, QuickBooks, your CRM, and your finance system. clariBI pulls revenue and margin every day, computes Rule of 40, plots the trend, and posts a note to the team when the score moves more than five points in a quarter. No spreadsheets to maintain. See pricing or browse the knowledge base for setup details.