Rule of 40 Sandbox
Check whether your growth-plus-profit clears the Rule of 40.
At 47% you clear the Rule of 40, your blend of growth and profitability signals a healthy, fundable business. Investors read this as efficient scaling.
The Rule of 40 says growth and profit are tradeable: burn is acceptable if you're growing fast enough to offset it. It matters most from Series B onward.
About this calculator
The Rule of 40 exists because growth and profitability trade off against each other in SaaS, and investors want one number that says whether that trade is being made well. This sandbox lets you plug in your year-over-year growth rate and profit margin, then shows the combined score against the 40% bar, plus exactly how far over or under you land.
How to use it
- Enter your year-over-year revenue growth rate.
- Enter your profit margin, EBITDA or free cash flow margin, whichever your board tracks, and note it can be negative if you're burning cash.
- Read the combined Rule of 40 score, calculated simply as growth plus margin.
- Check the verdict: a pass at 40%+, or the exact percentage-point gap you're short if you're below it.
Methodology
The score is nothing more than growth rate plus profit margin, added directly, no weighting, no adjustment. A company growing 35% with a 12% margin scores 47 and clears the bar; a company growing 10% with a -5% margin scores 5 and falls well short.
Because the two inputs are simply summed, they're treated as fully interchangeable in this model: a point of margin is worth exactly the same as a point of growth. In practice investors sometimes weight growth more heavily at earlier stages, but the classic Rule of 40 formulation, and this tool, treats them as equal and additive.
The tool grades results into three tones, a pass at 40%+, a caution zone from 30-39%, and a fail below 30%, since a small miss on the Rule of 40 is a very different situation from being far off the pace.
This calculator does not model which lever is cheaper to pull for your specific business, that depends on your cost structure and growth stage. It just tells you the size of the gap so you can decide whether to chase growth or margin to close it.
FAQ
Less so. It's primarily used from Series B onward, or for public SaaS comps, when a company has enough scale that the growth/profitability trade-off is a real strategic choice. A pre-seed company burning cash to find product-market fit isn't meaningfully judged by this metric.
Either is standard practice; the important thing is consistency. Pick the margin your board or investors already track and use it every time you run this, mixing EBITDA one quarter and FCF the next will make trend lines misleading.
Mathematically the formula allows it if margin is high enough, but negative growth combined with any margin level is a serious warning sign in SaaS. A high Rule of 40 score built on shrinking revenue and cost-cutting reads very differently than one built on healthy growth.
That's the classic formulation and what this calculator uses, but it's a simplification. Some investors apply more weight to growth at high-growth-rate companies. Use this as a quick directional check, not the final word on how your specific investors will underwrite the trade-off.