Rule of 40 Calculator — Growth Rate Plus Margin

Background.

The Rule of 40 says a software company's revenue growth rate plus its profit margin should add up to at least 40. It is the fastest single read on whether a SaaS business is trading growth for profitability at a defensible exchange rate: 35% growth with a 10% operating margin scores 45 and clears the bar; 30% growth with a 6% margin scores 36 and does not. This calculator computes the score, the gap to 40, and the margin or growth rate that would close it.

Before you read the number, know two things about where it comes from. First, this is a practitioner heuristic with a named origin, not an accounting standard. Brad Feld published it on 3 February 2015 after hearing a late-stage investor describe it at a board meeting, and Fred Wilson — who was at the same meeting — published his version a week later, on 10 February 2015. No standard-setter has ever defined it, no filing requires it, and its 40 is a round number chosen by an investor, not a threshold derived from data.

Second, and more practically: the two co-originators defined both of its terms differently, and the difference is large enough to flip a verdict. Wilson wrote that "your annual revenue growth rate + your operating margin should equal 40%" — annual revenue, operating margin. Feld wrote that "your growth rate + your profit should add up to 40%", specified year-over-year MRR growth, and said profit is "preferably calculated using EBITDA as the baseline metric". EBITDA margin exceeds operating margin by exactly depreciation and amortisation as a share of revenue, so a company with 30% growth, a 6% operating margin and 8 points of D&A scores 36 on Wilson's definition and 44 on Feld's. One fails, one passes, same company, same week, same rule. This calculator therefore computes and displays both, rather than picking one and hoping you agree.

That definitional looseness is why the score should never be quoted without its basis. It also has a regulatory edge for public filers: EBITDA is a non-GAAP measure, and the SEC requires companies disclosing non-GAAP measures to reconcile them to the nearest GAAP figure. SEC Release 33-10751 goes further for operating metrics generally, requiring a registrant that presents a metric to disclose its definition, how it is calculated, why it is useful and how management uses it — and to flag any change in the calculation between periods. A Rule of 40 score quoted with no basis is exactly the kind of metric that guidance exists to discipline.

The scope limit matters as much as the arithmetic. Feld scoped the rule explicitly to companies at scale — he names roughly $50 million of revenue, and says it starts correlating with product/market fit at around $1 million of MRR. Below that, the numbers are too volatile for the sum to mean anything: a seed-stage company growing 300% with a −250% margin scores 50 and is not thereby healthy. And the rule captures nothing about how the growth was bought. Two companies can both score 45 while one acquires customers at a two-year payback and the other at a six-year payback; the sales-efficiency and magic-number calculators are what separate them. Treat 40 as a conversation-opener, not a verdict.

What is rule of 40 calculator?

The Rule of 40 is a benchmark for software and SaaS companies stating that revenue growth rate plus profit margin, both expressed as percentages, should sum to at least 40. A company growing 40% a year is expected to break even; one growing 20% a year is expected to run a 20% margin; one that is not growing at all is expected to earn a 40% margin. It is a heuristic used by growth-equity and late-stage investors to compare businesses that have made different trade-offs between expansion and profitability, and it exists because raw growth and raw margin are each easy to optimise at the other's expense. Its origin is precisely dated: Brad Feld published it on 3 February 2015 and Fred Wilson on 10 February 2015, both attributing it to a late-stage investor who described it at a board meeting they both attended. It is not a GAAP or IFRS measure, no regulator requires it, and its two co-originators specified different inputs — Wilson annual revenue growth and operating margin, Feld year-over-year MRR growth and EBITDA. Because EBITDA margin always exceeds operating margin for a company with any depreciation or amortisation, the two definitions produce different scores for the same business, which is why any quoted score should name its basis.

How to use this calculator.

1. 01Enter year-over-year revenue growth as a percentage. Use annual revenue growth for Wilson's version of the rule or year-over-year MRR growth for Feld's, and be consistent about which one you report.
2. 02Enter operating margin — operating income divided by revenue. Losses are negative: a company losing 60 cents per dollar of revenue enters −60.
3. 03Enter depreciation and amortisation as a percentage of revenue if you want the EBITDA-basis score too. Leave it at zero and both scores collapse to the same number.
4. 04Read the primary score against 40. Above it, the business is converting growth and profit at a rate late-stage investors treat as healthy; below it, one of the two has to improve.
5. 05Read the two scores together. If they straddle 40, your company's Rule of 40 status depends entirely on which co-originator's definition someone applies — which is worth knowing before a board meeting, not after.
6. 06Use the two 'needed to pass' figures as levers. They tell you exactly how many points of margin the current growth rate can support, and how much growth the current margin can support.

The formula.

The calculation is a single addition, twice. The primary score adds the year-over-year revenue growth percentage to the operating margin percentage — Fred Wilson's stated formula. The second score adds depreciation and amortisation as a share of revenue on top, because EBITDA margin is operating margin plus D&A, giving Brad Feld's stated EBITDA basis. Both terms are already percentages of revenue, which is what makes the sum meaningful: adding a growth rate to a margin is only defensible because both are normalised by the same denominator. Three derived figures follow: the gap to 40 on the operating-margin basis, the operating margin that would put the current growth rate exactly at 40 (that is 40 minus growth, and it is negative whenever growth alone exceeds 40 — meaning losses of that size are tolerated), and the growth rate that would put the current margin exactly at 40. All arithmetic is carried at full decimal precision and rounded only at the return boundary, to two decimal places. The pass/fail sentence is evaluated against the ROUNDED score, so a raw 39.996 that displays as 40.00 is reported as clearing the benchmark rather than contradicting the number beside it.

A worked example.

Frequently asked questions.

References& sources.

1. [1]Feld, B. (3 February 2015). "The Rule of 40% For a Healthy SaaS Company." Feld Thoughts. Primary source: "The 40% rule is that your growth rate + your profit should add up to 40%", year-over-year MRR growth, profit "preferably calculated using EBITDA as the baseline metric", and the scale caveat (~$50m revenue; correlates from ~$1m MRR). Attributed by Feld to a late-stage investor at a board meeting. Retrieved 29 July 2026; quotes verified against the live post.
2. [2]Wilson, F. (10 February 2015). "The 40% Rule." AVC. Independent co-originating source, published one week after Feld and referencing his post: "Your annual revenue growth rate + your operating margin should equal 40%", with the worked cases at 100%, 40%, 20%, 0% and −10% growth. Names OPERATING MARGIN, not EBITDA. Retrieved 29 July 2026; quotes verified against the live post.
3. [3]U.S. Securities and Exchange Commission (30 January 2020). Release No. 33-10751, "Commission Guidance on Management's Discussion and Analysis of Financial Condition and Results of Operations." Requires a registrant presenting an operating metric to disclose its definition and method of calculation and to flag material changes to that calculation between periods. Effective 25 February 2020. sec.gov returns HTTP 403 to automated fetchers; release number, title and dates verified independently.
4. [4]U.S. Securities and Exchange Commission — Non-GAAP Financial Measures, Compliance & Disclosure Interpretations. Basis for the statement that EBITDA is a non-GAAP measure requiring reconciliation to the nearest GAAP figure when disclosed. sec.gov blocks automated fetchers; browser-accessible.
5. [5]Jordan, J., Hariharan, A., Chen, F., & Kasireddy, P. (21 August 2015). "16 Startup Metrics." Andreessen Horowitz. Source for the definitional discipline around the growth term — what belongs in recurring revenue and what does not. Retrieved 29 July 2026.