The Rule of 40 refuses to let either half be judged alone. Fast growth funded by enormous losses fails it, and so does comfortable profitability with no growth.
Fees & Pricing
The customers you lose without anyone deciding to leave.
Rule of 40 Calculator
Growth plus profit against the 40 line — and what the other half would need to be.
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Negative if you are losing money
$
Used to show the profit figure in dollars
Which profit measure to use is contested. EBITDA margin is the most common; free cash flow margin is the most honest. Whichever you pick, use it consistently — switching between them makes the score meaningless over time.
Rule of 40 score45Passes — the conventional healthy line
- Growth
- 60%
- Profit margin
- -15%-$750,000
- Combined
- 45
You pass. The trade is explicit: at 60% growth you can afford a margin as low as -20% and still clear 40.
Combinations that all score exactly 40
100% growth−60% margin
60% growth−20% margin
40% growth0% margin
20% growth20% margin
10% growth30% margin
Combinations that all score 40
| Growth | Profit margin | Score |
|---|---|---|
| 100% | −60% | 40 |
| 60% | −20% | 40 |
| 40% | 0% | 40 |
| 20% | 20% | 40 |
| 10% | 30% | 40 |
Every row is equally acceptable by the rule. That is the point: it prices the trade between growth and profitability rather than pretending one is always right.
Which profit number to use
This is genuinely contested. EBITDA margin is the most common in public comparables. Free cash flow margin is the most honest, because it captures working capital and capitalised costs. Operating margin sits between them.
When it does not apply
- Very early stage. A company growing 300% from a small base scores absurdly well while proving nothing.
- Pre-revenue or pre-product-market-fit. There is no meaningful growth rate to measure.
- Bootstrapped businesses by choice. A profitable company growing 15% at a 30% margin passes, but the rule was built to evaluate venture-scale trade-offs.
It is most useful from roughly $10M ARR upward, where both halves are stable enough for the sum to mean something.
GOOD QUESTIONS
Frequently asked
What is the Rule of 40?+
Year-over-year revenue growth rate plus profit margin should be at least 40. A company growing 60% with a −20% margin scores 40, as does one growing 20% at a 20% margin. It prices the trade-off rather than favouring one side.
Which profit margin should I use?+
EBITDA margin is most common in public comparables; free cash flow margin is the most honest. What matters more than the choice is consistency — switching between them makes the trend meaningless.
Does the Rule of 40 apply to early-stage startups?+
Not usefully. A company growing 300% from a tiny base scores extraordinarily well while proving very little. It becomes meaningful from roughly $10M ARR, where both inputs are stable.
Is a score above 40 always better?+
Generally yes, though a very high score achieved through profitability alone can signal underinvestment in growth. Investors typically prefer 40 reached with strong growth over 40 reached with high margins and stagnation.