What is Rule of 40?
The Rule of 40 is a SaaS benchmark that states a healthy software company's combined revenue growth rate and profit margin should equal or exceed 40%. For example, a company growing at 30% with 10% profit margins meets the Rule of 40. A company growing at 60% can afford -20% margins.
The Rule of 40 balances growth and profitability. High-growth companies can justify burning cash if they're growing fast enough. Slower-growing companies need to show profitability. The formula is: Revenue Growth Rate (%) + EBITDA Margin (%) ≥ 40.
In 2026, the Rule of 40 has become the default benchmark for SaaS board meetings and investor presentations. Companies exceeding the Rule of 40 trade at 2-4x higher valuation multiples than those below it.
Why It Matters
The Rule of 40 is the single most-referenced SaaS benchmark in board rooms and investor meetings. It determines whether your growth-profitability balance is healthy and directly impacts valuation multiples.
Frequently Asked Questions
What is the Rule of 40?
The Rule of 40 states that a SaaS company's revenue growth rate plus profit margin should be at least 40%. A company growing 25% with 15% margins meets it (25+15=40).
How do you calculate the Rule of 40?
Revenue Growth Rate (year-over-year %) + EBITDA Margin (%) = Rule of 40 score. Above 40 is good. Above 60 is elite.
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Richard Ewing is a Product Economist and AI Capital Auditor. He helps companies translate technical complexity into financial clarity.
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