---
title: "What Is Rule of 40?"
term: "Rule of 40"
description: "The Rule of 40 is a SaaS benchmark stating that revenue growth rate plus profit margin should exceed 40% — a shorthand for balancing growth and profitability at scale."
date: 2026-07-25T00:00:00.000Z
updated: 2026-07-25T00:00:00.000Z
topics: ["venture-capital"]
source: https://venturecapitaltracker.com/glossary/rule-of-40
---

# What Is Rule of 40?

> The Rule of 40 is a SaaS benchmark stating that revenue growth rate plus profit margin should exceed 40% — a shorthand for balancing growth and profitability at scale.

**Rule of 40** is a SaaS heuristic: **year-over-year revenue growth % + profit margin % ≥ 40%**.

### How it works

If ARR grows 35% YoY and EBITDA margin is 8%, Rule of 40 score = **43** — passing the threshold. A company growing 60% at −25% margin scores 35 — failing, but possibly acceptable at early scale where efficiency rules are relaxed.

Margin definition varies: EBITDA, operating margin, or free cash flow margin. Public SaaS investors popularized the metric; private boards adopt it for Series C+ when growth slows and profitability questions rise.

Rule of 40 is not physics — high-growth startups intentionally fail it while investing in GTM. It bites when growth decelerates and losses remain large.

Pair with **[burn multiple](/glossary/burn-multiple)**, [net revenue retention](/glossary/net-revenue-retention), and [SaaS metrics](/glossary/saas-metrics) for fuller picture.

### Why it matters

- **Founders:** Use it to justify investment phase vs profit push in board conversations — name which margin you use consistently.
- **Investors:** Quick screen for public comps and late-stage private pricing; sub-40 names face multiple compression in risk-off markets.

### Common mistake

Applying Rule of 40 to pre-product companies with meaningless margin lines. It is most informative once revenue base is material and growth rates are sustainable percentages, not triple-digit from tiny bases.

### Related ideas

See also [SaaS metrics](/glossary/saas-metrics), [burn multiple](/glossary/burn-multiple), [revenue churn](/glossary/revenue-churn), and [CAC payback](/glossary/cac-payback).

## FAQ

### What is Rule of 40 in simple terms?

Add your year-over-year revenue growth percentage to your profit margin percentage (often EBITDA or free cash flow margin). If the sum is 40 or higher, you meet the Rule of 40 — a common SaaS health check at scale.

### Why does Rule of 40 matter?

For founders, it frames the tradeoff between growth and burn for late-stage planning. For investors, it separates companies that can grow efficiently from those buying revenue with unsustainable losses.


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Source: https://venturecapitaltracker.com/glossary/rule-of-40