What is the Rule of 40?
The Rule of 40 is a software benchmark: revenue growth rate plus profit margin should total at least 40%. It lets investors compare a fast-growing company that loses money with a slower one that earns a profit. Brad Feld wrote about it in 2015 after hearing it from a late-stage investor. EBITDA margin is the most common profit measure, though some use free cash flow margin.
Why it matters to a revenue leader
The Rule of 40 frames the trade-off a revenue leader lives with: money spent to grow faster lowers margin. A company above 40% has room to invest in sales capacity, and one below it will face pressure to grow faster or spend less, with sales headcount among the first lines examined. Knowing the company's score tells a revenue leader how much hiring the board will tolerate.
How to calculate it
Rule of 40 score = Revenue growth rate (%) + Profit margin (%), measured over the same period.
Common mistake: mixing periods, such as forward growth with trailing margin, which flatters the score.
Example
Fictitious numbersA company grows revenue 30% a year with an EBITDA margin of -5%, for a score of 25. To reach 40, it needs 45% growth at the same margin, or a 10% margin at the same growth.
"What is our Rule of 40 score, and does the hiring plan move it up or down?"
Sources
- The SaaS Rule of 40 Explained checked 9 Oct 2026
- The Rule of 40% For a Healthy SaaS Company checked 9 Oct 2026