The Rule of 40 is a framework used by SaaS investors to assess whether a company's growth rate and profitability are in healthy balance. Here is what different scores mean in practice.
Rule of 40 formula
Score = Revenue growth rate (%) + Profit margin (%)
Where profit margin is typically EBITDA margin or FCF margin.
A score of 40+ is considered "passing." A score above 60 is exceptional.
Benchmarks by company stage
| Stage | Median Rule of 40 | Top quartile |
|---|---|---|
| Pre-Series A | 30–50 | 60+ |
| Series A–B | 40–60 | 80+ |
| Series C+ | 35–55 | 70+ |
| Public SaaS | 30–50 | 60+ |
Rule of 40 vs. valuation multiples (public SaaS)
Companies scoring above 40 trade at ~7–12× ARR. Companies scoring above 60 trade at ~10–18× ARR. Companies below 40 typically trade at ~3–6× ARR.
Note: multiples compress during market downturns — these are approximate.
The tradeoff between growth and profitability
Early-stage companies typically achieve Rule of 40 via growth (e.g. 100% growth at −60% margins). Mature SaaS companies achieve it via profitability (e.g. 20% growth at 25% FCF margin). Both paths are valid — what matters is the sum.
Use the Rule of 40 calculator to compute your score and see where you stand.