Rule of 40 Calculator — Growth Rate Plus Margin

Background.

A software company growing revenue 60% a year while losing 20 cents on every dollar, and another growing 15% with a 25% operating margin, look like opposites. On the Rule of 40 they score the same: 60 − 20 = 40 and 15 + 25 = 40. That is the idea behind the rule. It asks whether growth and profitability together reach at least 40 percentage points, so a business that spends margin to buy growth and one that gives up growth to earn margin can be judged on one scale.

It is an investor's rule of thumb, not an accounting measure, and it has a known birthday. Brad Feld wrote it up on 3 February 2015 after hearing a late-stage investor describe it at a board meeting, and Fred Wilson published his own version a week later. Their wording differs in a way that changes the number. Wilson adds annual revenue growth to operating margin. Feld measures growth as the year-over-year change in monthly recurring revenue and prefers EBITDA for the profit side, which adds depreciation and amortisation back. Both scores appear here: the operating-margin score as the headline and the EBITDA score beside it, with the margin or growth rate that would bring the company exactly to 40.

Feld also limited the rule to companies at scale, naming roughly $50 million of revenue, and said it starts to line up with product/market fit at around $1 million of monthly recurring revenue. On a smaller base, growth percentages and margins move too violently from year to year for their sum to say much about the business.

What is rule of 40 calculator?

The Rule of 40 score is a software company's revenue growth rate plus its profit margin, both in percent, measured against a benchmark of 40. Because both terms are expressed relative to revenue, adding them treats a point of growth and a point of margin as worth the same, which lets investors compare companies that have chosen different trade-offs: one growing 40% can break even, one with no growth needs a 40% margin, and one shrinking 10% needs a 50% margin. No accounting standard or regulator defines the score, so its value depends entirely on which growth figure and which profit measure go into it.

How to use this calculator.

1. 01Enter year-over-year revenue growth in percent. Annual revenue growth follows Wilson's wording and year-over-year MRR growth follows Feld's; for a steady subscription business they are close, but large contracts signed mid-year can pull them apart. A shrinking business enters a negative figure.
2. 02Enter operating margin, operating income divided by revenue. A company losing 60 cents per dollar of revenue enters −60. Use the margin from the income statement where you can, rather than an adjusted figure that excludes stock-based compensation.
3. 03Enter depreciation and amortisation as a percentage of revenue to get the EBITDA-basis score. It is the amortisation of capitalised software and acquired intangibles plus depreciation of equipment, usually found in the cash-flow statement. Leaving it at 0 makes both scores identical.
4. 04Compare both scores with 40, then read the two figures needed to pass: how much margin your growth rate can carry, and how much growth your margin requires.

The formula.

The headline score is S = g + m, where g is year-over-year revenue growth and m is operating margin (EBIT ÷ revenue), both in percent. The EBITDA score is S + d, where d is depreciation and amortisation as a percentage of revenue, because EBITDA margin is operating margin with D&A added back. Since d cannot be negative, the EBITDA score is never below the headline score, and the gap between them is exactly d.

Three further figures come from rearranging the same sum. The gap to 40 is S − 40. The margin needed to pass is 40 − g, the operating margin that would put the current growth rate exactly on the line; when growth alone exceeds 40 it turns negative, and its size is the largest operating loss that growth can carry. The growth needed to pass is 40 − m, the growth rate that would put the current margin exactly on the line.

Adding a growth rate to a margin is looser than it looks. Growth is measured against last year's revenue and margin against this year's, so the two percentages share a name but not a denominator. The rule works anyway because it was never meant as precise accounting, only as a common scale for weighing speed against profit.

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.