What is the Rule of 40 in SaaS?

A quick health check: revenue growth rate plus profit margin should reach 40% or more. It lets investors compare a fast-growing, loss-making company with a slower, profitable one on a single number.

How do you calculate the Rule of 40?

Add your year-over-year revenue growth percentage to your profit margin percentage. 25% growth and a 20% EBITDA margin score 45, which passes. 50% growth with a −15% margin scores 35, which misses.

Should I use EBITDA or free cash flow margin?

Either, as long as you are consistent. Brad Feld’s original post preferred EBITDA and suggested checking the result against free cash flow and other profit measures. Say which one you used when you share the score.

What growth rate do I need to pass the Rule of 40?

40 minus your profit margin. At a 10% EBITDA margin you need 30% growth; at a −20% margin you need 60%. At a 40% margin, flat revenue passes.

What is a good SaaS magic number?

Rory O’Driscoll of Scale Venture Partners wrote in 2010 that above 1x has proven a compelling investment, 0.5x to 1x works but is capital-inefficient, and below 0.5x the model is not figured out yet. Scale later called 0.7x a fairly healthy baseline.

What is a good burn multiple?

David Sacks’s 2020 rules of thumb for venture-stage startups: under 1x amazing, 1x to 1.5x great, 1.5x to 2x good, 2x to 3x suspect, over 3x bad. Burn multiple is net burn divided by net new ARR.

What is the SaaS quick ratio?

New plus expansion MRR divided by contraction plus churned MRR: how many dollars you add for each dollar you lose. Mamoon Hamid, who introduced it, called a quick ratio of four or above quite desirable.

Does the Rule of 40 apply to early-stage startups?

Brad Feld framed it for SaaS companies at scale, around $50 million in revenue. Earlier on, growth swings too much for the sum to settle; David Sacks designed the burn multiple for venture-stage startups instead.

No. The calculator runs in your browser and sends nothing to SaaSCity. The share link puts your numbers in the URL, so only people you send it to see them.

Free calculator

Rule of 40 calculator with magic number and burn multiple

Add your revenue growth and profit margin to see whether you pass the Rule of 40 and what growth you need at your margin. Then check sales efficiency, burn and quick ratio against the bands their authors published.

Updated October 27, 2026

Your numbers

Revenue growth (YoY)

Profit margin

Profit measure

Efficiency scorecard

Optional. Pick a metric to edit it.

Last quarter’s revenue

This quarter’s revenue

Last quarter’s S&M spend

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Rule of 40 score

Below 40

30% growth + 5% EBITDA margin. At this margin you need 35% growth to pass, or a 10% margin at this growth.

Growth against margin

Scorecard

Magic number0.80x0.5x to 1x: capital-inefficient
Burn multiple1.25xGreat
Quick ratio4.294 or above: desirable

Bands: magic number, Rory O’Driscoll (Scale Venture Partners, 2010); burn multiple, David Sacks (2020), for venture-stage startups; quick ratio, Mamoon Hamid.

You score 35, 5 points short of 40. Each extra point of growth or margin counts the same.

Quick answer

What is the Rule of 40?

The Rule of 40 says a SaaS company’s revenue growth rate plus its profit margin should be at least 40%. Score = year-over-year revenue growth % + EBITDA (or free cash flow) margin %. A company growing 30% with a 5% EBITDA margin scores 35 and misses; at a 5% margin it needs 35% growth to pass.

How to use the Rule of 40 calculator

Enter growth and margin
Year-over-year revenue (or ARR) growth and your profit margin. Negative margins are fine: type a minus sign.
Pick the profit measure
EBITDA or free cash flow. Use the same one every time you compare.
Fill in the scorecard
Optional: two quarters of revenue and last quarter’s sales and marketing spend, net burn and net new ARR, and a month’s MRR movements.
Share the score
Download the score as a PNG or copy the link with your numbers. Nothing is stored on our side.

How the calculator works

The score is revenue growth plus profit margin, both in percent. 40 or more passes. A company losing money can pass by growing fast, and a slow grower can pass with high margins, which is the point: the rule trades one for the other at a rate of one to one.

The growth you need at your margin is 40 minus the margin. The chart puts margin on the horizontal axis and growth on the vertical one; every point on the diagonal line scores exactly 40.

The scorecard adds three efficiency checks. Magic number: the quarter’s revenue increase, annualised, per dollar of last quarter’s sales and marketing. Burn multiple: cash burned per dollar of net new ARR. Quick ratio: MRR added per dollar of MRR lost.

Formula

Rule of 40 score = revenue growth % + profit margin %
Growth needed to pass = 40 − profit margin
Magic number = (this quarter’s revenue − last quarter’s) × 4 ÷ last quarter’s S&M spend
Burn multiple = net burn ÷ net new ARR
Quick ratio = (new MRR + expansion MRR) ÷ (contraction MRR + churned MRR)

Worked example

Revenue grew from $4.0M to $5.2M: growth = $1.2M ÷ $4.0M = 30%.
EBITDA was $260k on $5.2M of revenue: margin = 5%.
Score: 30 + 5 = 35. Below 40, so it misses.
Growth needed at a 5% margin: 40 − 5 = 35%.
Or, at 30% growth, the margin needed: 40 − 30 = 10%.

Where the Rule of 40 comes from

Brad Feld wrote it up in February 2015, crediting a late-stage investor: your growth rate plus your profit should add up to 40%. He applied it to SaaS companies at scale, around $50 million in revenue, and preferred EBITDA as the profit measure, checked against free cash flow and others. For scale: the median private B2B SaaS company grew 22% in 2025 (SaaS Capital), so it would need a 18% margin to pass. Figures last verified October 27, 2026.

SaaS magic number

Rory O’Driscoll of Scale Venture Partners set out the calculation in 2010: take the change in subscription revenue between two quarters, multiply it by four and divide by the earlier quarter’s sales and marketing spend. A decade later Scale described 0.7x as a fairly healthy baseline for most SaaS businesses.

Magic number	What it means (Rory O’Driscoll, 2010)
Above 1x	Has proven to be a compelling business investment.
0.5x to 1x	Will probably succeed and reach cash-flow breakeven, but in a relatively capital-inefficient way.
Below 0.5x	Has not yet figured out its model.

Burn multiple

David Sacks introduced the burn multiple in April 2020: net burn divided by net new ARR over the same period, so it shows how much cash each dollar of new ARR costs. He gave these rules of thumb for venture-stage startups and expects the multiple to improve as a company matures.

Burn multiple	Efficiency (David Sacks, 2020)
Under 1x	Amazing
1x to 1.5x	Great
1.5x to 2x	Good
2x to 3x	Suspect
Over 3x	Bad

SaaS quick ratio

Mamoon Hamid introduced the quick ratio at the first SaaStr Annual: new plus expansion revenue divided by revenue lost to churn and contraction. In his words, “a quick ratio of four, or above” is quite desirable. Below 1 is simple arithmetic: you lose more MRR than you add, so MRR shrinks.

Rule of 40 questions

What is the Rule of 40 in SaaS?: A quick health check: revenue growth rate plus profit margin should reach 40% or more. It lets investors compare a fast-growing, loss-making company with a slower, profitable one on a single number.
How do you calculate the Rule of 40?: Add your year-over-year revenue growth percentage to your profit margin percentage. 25% growth and a 20% EBITDA margin score 45, which passes. 50% growth with a −15% margin scores 35, which misses.
Should I use EBITDA or free cash flow margin?: Either, as long as you are consistent. Brad Feld’s original post preferred EBITDA and suggested checking the result against free cash flow and other profit measures. Say which one you used when you share the score.
What growth rate do I need to pass the Rule of 40?: 40 minus your profit margin. At a 10% EBITDA margin you need 30% growth; at a −20% margin you need 60%. At a 40% margin, flat revenue passes.
What is a good SaaS magic number?: Rory O’Driscoll of Scale Venture Partners wrote in 2010 that above 1x has proven a compelling investment, 0.5x to 1x works but is capital-inefficient, and below 0.5x the model is not figured out yet. Scale later called 0.7x a fairly healthy baseline.
What is a good burn multiple?: David Sacks’s 2020 rules of thumb for venture-stage startups: under 1x amazing, 1x to 1.5x great, 1.5x to 2x good, 2x to 3x suspect, over 3x bad. Burn multiple is net burn divided by net new ARR.
What is the SaaS quick ratio?: New plus expansion MRR divided by contraction plus churned MRR: how many dollars you add for each dollar you lose. Mamoon Hamid, who introduced it, called a quick ratio of four or above quite desirable.
Does the Rule of 40 apply to early-stage startups?: Brad Feld framed it for SaaS companies at scale, around $50 million in revenue. Earlier on, growth swings too much for the sum to settle; David Sacks designed the burn multiple for venture-stage startups instead.
Is my data stored?: No. The calculator runs in your browser and sends nothing to SaaSCity. The share link puts your numbers in the URL, so only people you send it to see them.

Cite this tool

Free to link and quote. Use this reference:

SaaSCity, "Rule of 40 Calculator", October 27, 2026. https://saascity.io/free-tools/rule-of-40-calculator