Rule of 40: calculator, formula and 2026 SaaS benchmarks
What is the Rule of 40?
The Rule of 40 says a software company's revenue growth rate plus its profit margin should add up to at least 40%. A company growing 30% with a 10% margin scores 40. The profit measure varies: EBITDA, free cash flow or operating margin, so check which one a score uses.
Key facts
- Brad Feld popularized it in 2015, after hearing it from an unnamed late-stage investor: "The 40% rule is that your growth rate + your profit should add up to 40%." (Feld, 2015)
- Across more than 200 software companies from 2011 to 2021, businesses exceeded the Rule of 40 only 16% of the time, McKinsey found. (McKinsey, 2021)
- Among private, PE-backed software companies, 26% of those above $80M in revenue beat it, against 9% of those below $30M. (BCG, 2025)
- The median private SaaS company scored 25 in 2025, up from 15 in 2024, in Benchmarkit's data. (Benchmarkit, 2026)
- ICONIQ calls it "the strongest predictor of valuation" among the metrics it tracks for public software companies. (ICONIQ, 2025)
Rule of 40 calculator
Enter year-on-year revenue (or ARR) growth and your profit margin, both as percentages. Use the same profit measure as the benchmark you compare with: public-company figures usually use free cash flow margin, private-company surveys often EBITDA.
Want your Rule of 40 from your real numbers? CX Cash is being built to track growth, margins and free cash flow from your accounting data, so the score updates every month.
How to calculate the Rule of 40
Rule of 40 score = Revenue growth % + Profit margin %
In words: add the year-on-year growth rate to the profit margin. A score of 40 or more passes.
- Revenue growth %: Year-on-year growth in revenue, or in ARR for private companies. Organic growth if acquisitions would distort it.
- Profit margin %: Free cash flow margin, EBITDA margin or operating margin, as a share of revenue. A loss counts as a negative number.
Worked example
An illustrative SaaS company growing 30% a year with a 5% free cash flow margin. The results below are computed by the calculator's tested code.
| Input | Value |
|---|---|
| Revenue growth | 30% |
| Free cash flow margin | 5% |
Rule of 40 score: 35 Points above or below 40: -5
30% growth + 5% margin = 35
A score of 35, five points short. If growth slows to 20% next year, the company needs a 20% margin to stay at 40. As Feld puts it: "Grow 20% with 20% margins, you pass."
In a spreadsheet
- Rule of 40 score, with growth in B2 and margin in C2 (as percentages): =B2+C2
- Growth from revenue now (B3) and a year ago (B2): =B3/B2-1
- Free cash flow margin, with operating cash flow in B2, capital expenditure in C2 and revenue in D2: =(B2-C2)/D2
- Bessemer's Rule of X, with growth in B2, a multiplier in C2 and FCF margin in D2: =B2*C2+D2
How founders and investors read the Rule of 40
If you're the founder
- It tells investors whether you're buying growth at a sensible price. Feld: "Grow 40% and break even, you pass. Grow 20% with 20% margins, you pass. Grow 50% and lose 10%, you pass."
- Below about $25M of ARR it carries little weight. ICONIQ: "We typically only begin to place real weight against Rule of 40 for companies with at least ~$25M in ARR" (ICONIQ, 2025).
- State your profit measure. An EBITDA score and a free cash flow score for the same company can differ by many points.
Questions you'll be asked
- Is that on free cash flow, EBITDA or operating margin?
- How much of the margin comes from one-off items or capitalized costs?
- Is the growth organic?
- Where will the score be in a year if growth slows?
If you're the investor or LP
- Two companies with the same score can be opposites: one growing fast and losing money, one barely growing and very profitable. Look at the mix.
- Investors pay more for growth than for margin at the same score. Bessemer found its growth-weighted Rule of X explains valuations better: "Rule of 40 versus FV/NTM revenue R2 is 50% whereas Rule of X yields a 62% R2" (TechCrunch, 2023).
- Sustained scores are rare. Bain found "only 16% outperformed for all five years" from 2013 to 2017 (Bain, 2018).
Questions to ask the company
- Which profit measure is this, and is it adjusted?
- What were the score and its mix in each of the last three years?
- Is growth organic, and what does churn do to it?
- What happens to the margin if you hold growth at today's rate?
What is a good Rule of 40 score?
40 is the bar, but few companies clear it for long. Public SaaS companies sit just under it at the median; private companies average lower, and their scores rise with scale. Each benchmark below says which profit measure it uses.
Show the numbers
| Growth bucket | Last 12 months | Next 12 months |
|---|---|---|
| Hyper growth (>40%) | 85.0% | 87.0% |
| High growth (>22%) | 54.0% | 54.0% |
| Mid growth (>15%) | 42.0% | 37.0% |
| Low growth (<15%) | 35.0% | 34.0% |
| All companies | 38.0% | 37.0% |
Benchmarks
| Segment | Measure | Typical | Top quartile | As of | Sample | Source |
|---|---|---|---|---|---|---|
| Public software companies | ||||||
| Public SaaS comparables | Score, growth + FCF margin (last 12 months) | 38% | 46% | 25 Sep 2026 | About 70 companies | Clouded Judgement, Sep 2026 |
| Public SaaS | Implied score: median growth + median FCF margin | 33% (15% + 18%) | — | 2025 | High Alpha's public comparison | High Alpha, 2025 |
| 86 public software companies | Share beating 40 in all five years | 16% | — | 2013–17 stale | Bain study | Bain, 2018 |
| More than 200 software companies | Share of company-years above 40 | 16% | — | 2011–21 stale | McKinsey analysis | McKinsey, 2021 |
| Private software companies | ||||||
| Private B2B SaaS | Score (margin measure not stated) | 25% (15% in 2024) | 43% | CY 2025 | 110 companies (Benchmarkit) | Benchmarkit, 2026 |
| PE-backed, more than $80M revenue | Share beating 40 (growth + EBITDA) | 26% | — | May 2025 | BCG benchmark, 107 companies | BCG, 2025 |
| PE-backed, $30M–80M revenue | Share beating 40 (growth + EBITDA) | 22% | — | May 2025 | BCG benchmark, 107 companies | BCG, 2025 |
| PE-backed, less than $30M revenue | Share beating 40 (growth + EBITDA) | 9% | — | May 2025 | BCG benchmark, 107 companies | BCG, 2025 |
Scale matters: in BCG's private-company benchmark the share beating 40 nearly triples from the smallest to the largest companies.
Growth dominates the score. Public companies growing over 40% score 85 at the median; those growing under 15% score 35.
Compiled Oct 2, 2026. Next review: January 2027. Left out: ICONIQ 2026 State of Scaling (The report prohibits reproduction of its figures); High Alpha 2025 tables by ARR band (Marked proprietary and confidential; we quote only its public-company sentence). Download these benchmarks as CSV.
The Rule of 40 in the wild: two passes, opposite companies
Two public software companies that report a Rule of 40 score in their SEC filings, both for the second quarter of 2026, each with its own definition. (Palantir, Aug 2026)
| Company | Growth measure | Profit measure | Score | Source |
|---|---|---|---|---|
| Palantir | Revenue growth of 93% | Adjusted operating margin of 62% | 155% | 8-K, Aug 2026 |
| Blackbaud | Organic revenue growth of 3.0% | Adjusted EBITDA margin of 38.0% | 41.0% | 8-K, Jul 2026 |
Both clear 40. Palantir does it almost entirely with growth, Blackbaud almost entirely with margin. The single number hides which kind of company you're looking at, which is the case for reading growth and margin separately, or for weighting growth more as Bessemer's Rule of X does.
Both use adjusted, non-GAAP margins as defined in their releases. Palantir defines its score as "the sum of our revenue growth rate year-over-year and our adjusted operating margin"; Blackbaud as "non-GAAP organic revenue growth plus non-GAAP adjusted EBITDA margin".
Rule of 40 vs Rule of X, burn multiple, magic number and FCF margin
| Metric | Answers | Ignores | Use it when | It misleads when |
|---|---|---|---|---|
| Rule of 40 | Whether growth and profit together are healthy | How the two are mixed, and what growth cost | Judging a scaled software company's balance | The profit measure isn't stated, or the company is small |
| Rule of X | The same, with growth weighted two to three times | The choice of multiplier, which is a judgment | Explaining valuations | The multiplier is picked to flatter |
| Burn multiple | Net burn per $1 of net new ARR | Profitable companies, where it doesn't apply | Judging cash efficiency of growth while losing money | ARR is small |
| SaaS magic number | New annual revenue per $1 of sales and marketing | Spend outside sales and marketing | Deciding whether to spend more on growth | One quarter is unusual |
| Free cash flow margin | Cash generated per $1 of revenue | Growth | Valuing mature companies | Growth is being cut to inflate it |
The Rule of 40 is a sum, so any mix works: 40% growth at break-even, 20% growth with a 20% margin, or 50% growth while losing 10%. Bessemer's Rule of X multiplies growth by about 2 for private companies and 2 to 3 for public ones before adding free cash flow margin.
Common mistakes: how the Rule of 40 gets flattered
- Not stating the profit measure. EBITDA, operating margin and free cash flow give different scores for the same company. A benchmark is only comparable if it uses the same measure.
- Using adjusted margins without saying so. Adjusted margins that exclude stock-based compensation or one-off costs raise the score. Public companies that report the metric define their adjustments; private companies should too.
- Applying it too early. Feld meant it for companies "at scale – assume at least $50 million in revenue", and ICONIQ puts little weight on it below about $25M of ARR.
- Counting acquired growth. An acquisition lifts revenue growth for a year without any underlying improvement. Blackbaud reports organic growth for this reason.
- Reading one year. Sustained performance is the hard part: McKinsey found companies cleared the bar only 16% of the time, and Bain that only 16% did so in all five years studied.
Where the Rule of 40 came from and how it's regarded today
| When | What happened | Source |
|---|---|---|
| Aug 2026 | Palantir reports a Rule of 40 score of 155% in its quarterly earnings release. | Palantir, Aug 2026 |
| Jun 2026 | Brad Feld revisits the rule: "I still like it." | Feld, 2026 |
| Sep 2025 | ICONIQ: the Rule of 40 "has emerged as the strongest predictor of valuation". | ICONIQ, 2025 |
| May 2025 | BCG finds scale strongly predicts which private software companies beat 40. | BCG, 2025 |
| Dec 2023 | Bessemer proposes the Rule of X, weighting growth two to three times more than profit. | Deeter & Bondy, 2023 |
| Dec 2023 | KeyBanc and Sapphire: "The Rule of 40 is more important to valuation than it was in the free money era". | KeyBanc & Sapphire, 2023 |
| Aug 2021 | McKinsey finds more than 200 software companies cleared the bar only 16% of the time over 2011–21. | McKinsey, 2021 |
| Dec 2018 | Bain finds only 16% of 86 public software companies beat 40 in all five years from 2013 to 2017. | Bain, 2018 |
| Aug 2018 | LivePerson's long-term incentive plan ties executive pay to a "Rule of 40" component. | LivePerson, 2018 |
| Apr 2018 | Activist investor Elliott cites the "often-cited “Rule of 40”" in a letter to Commvault's board. | Elliott, 2018 |
| Feb 2015 | Fred Wilson posts "The 40% Rule" after the same board meeting. | Wilson, 2015 |
| Feb 2015 | Brad Feld blogs the rule after hearing it from an unnamed late-stage investor at a board meeting. | Feld, 2015 |
How it's regarded today
- A valuation driver. ICONIQ calls it "the strongest predictor of valuation", and KeyBanc and Sapphire said in 2023 that it "is more important to valuation than it was in the free money era".
- Profit carries more of the score. ICONIQ found the median public score "holding at ~50%, with FCF now contributing ~45% of the" total, as companies cut costs after 2022.
- Growth-weighted variants. Bessemer's Rule of X and similar variants weight growth more heavily, on the evidence that markets pay more for a point of growth than a point of margin.
- Reported by companies. Public companies including Palantir and Blackbaud now report a Rule of 40 score in their earnings releases, each with its own definition.
- SaaS and the Rule of 40: Keys to the critical value creation metric (McKinsey, 2021). More than 200 software companies cleared the Rule of 40 only 16% of the time over 2011–21.
- Hacking Software's Rule of 40 (Bain, 2018). Only 16% of 86 public software companies beat it in all five years from 2013 to 2017.
- Rule of 40 Lessons from the Top Performers in Software (BCG, 2025). Among 107 PE-backed software companies, the share beating 40 rises from 9% to 26% with scale.
- The Rule of X and how cloud leaders should think about growth versus profit (Deeter & Bondy, 2023). A growth-weighted Rule of X explains valuation multiples better than the Rule of 40 (R² of 62% vs 50%).
What experts say about the Rule of 40
“I still like it. It’s a clean way to compress two things that usually fight each other - growth and profitability - into one number.”
“Their ultimate point is correct: growth matters more and blind adherence to an unweighted rule of 40 may take you to the wrong place. But this metric needs some more work.”
“The moment you start weighting the inputs, you’re admitting the flat number was never the whole story.”
Where they disagree
An early champion and two Bessemer investors on whether growth and profit deserve equal weight.
“I have never seen growth and profitability so nicely tied together in a simple rule like this.”
“Many finance executives love the Rule of 40 for its clarity, but assigning equal weight to growth and profitability for late-stage businesses is flawed and has caused misguided business decisions.”
Rule of 40 FAQ
What is the Rule of 40?
A rule of thumb that a software company's revenue growth rate plus its profit margin should add up to at least 40%. It checks that a company isn't buying growth too expensively, or cutting growth too far for profit.
How do you calculate the Rule of 40?
Add the year-on-year revenue growth rate to the profit margin, both in percent. 30% growth with a 10% margin scores 40; 50% growth with a −10% margin also scores 40.
Which profit margin should I use?
There's no standard. Public-company comparisons mostly use free cash flow margin; many private-company surveys and the original posts used EBITDA or operating margin. Use the measure your benchmark uses, and say which.
What is a good Rule of 40 score?
40 or more passes. The median public SaaS company scored 38 over the last 12 months to September 2026, and the median private company 25 in 2025. Above 55 put a public company in the top decile.
Does the Rule of 40 apply to early-stage startups?
Not much. Feld meant it for companies with at least $50 million in revenue, and ICONIQ only puts real weight on it from about $25M of ARR. Early on, growth and efficiency metrics such as the burn multiple say more.
What is the Rule of X?
Bessemer's variant, from 2023: growth multiplied by about 2 for private companies (2 to 3 for public ones) plus free cash flow margin. It weights growth more, because markets pay more for it.
Who came up with the Rule of 40?
No one is credited. Brad Feld and Fred Wilson both wrote about it in February 2015 after hearing it from an unnamed late-stage investor at a board meeting, and Bain dates its popularization by venture capitalists to 2015.
Related metrics and guides
Sources
Every link was opened and checked. Archived copies guard against links that move or disappear.
Primary data
- Palantir Reports Q2 2026 U.S. Comm Revenue Growth of 149% Y/Y and Revenue Growth of 93% Y/Y (Exhibit 99.1). Palantir Technologies (SEC filing), 3 Aug 2026. Read from the archived copy. Archived copy
- Blackbaud Announces 2026 Second Quarter Results (Exhibit 99.1). Blackbaud (SEC filing), 29 Jul 2026. No archived copy found.
- Letter to the Board (Schedule 13D on Commvault, Exhibit 99.2). Elliott Management (SEC filing), 2 Apr 2018. No archived copy found.
- Long-Term Incentive Plan of LivePerson, Inc. (10-Q, Exhibit 10.1). LivePerson (SEC filing), 6 Aug 2018. Archived copy
- State of Software 2025: Rethinking the Playbook. ICONIQ Analytics, Sep 2025. Investor's portfolio and public-company data; quoted, not reproduced. Archived copy
- 2026 SaaS and AI Metrics Benchmarks. Benchmarkit, 1 Jun 2026. Sponsored report; margin measure not stated. Archived copy
- 2025 SaaS Benchmarks Report. High Alpha, Nov 2025. Marked proprietary; quoted, not reproduced. Archived copy
- KeyBanc Capital Markets and Sapphire Ventures Private SaaS Company Survey Reveals Pivot to Efficient Growth and Profitability. Sapphire Ventures (press release), 20 Dec 2023. Press release; the full survey is gated. Archived copy
Consultancy
- SaaS and the Rule of 40: Keys to the critical value creation metric. McKinsey & Company, 3 Aug 2021. Archived copy
- Hacking Software's Rule of 40. Bain & Company, Dec 2018. Archived copy
- Hacking Software's Rule of 40 (brief). Bain & Company, Dec 2018. Archived copy
- Rule of 40 Lessons from the Top Performers in Software. Boston Consulting Group, 20 May 2025. Archived copy
Practitioner
- The Rule of 40% For a Healthy SaaS Company. Brad Feld (Feld Thoughts), 3 Feb 2015. Archived copy
- The 40% Rule. Fred Wilson (AVC), 10 Feb 2015. Archived copy
- Does the Rule of 40 Work for Hardware?. Brad Feld (Feld Thoughts), 15 Jun 2026. Archived copy
- The Rule of X and how cloud leaders should think about growth versus profit. Byron Deeter and Sam Bondy (TechCrunch column), 17 Dec 2023. Bessemer's own analysis. Archived copy
- Kellblog Predictions for 2024. Dave Kellogg (Kellblog), 2 Jan 2024. Archived copy
- Clouded Judgement 9.25.26 - Own the Interaction Layer. Jamin Ball (Altimeter), 25 Sep 2026. Newsletter; Altimeter trades in public securities; figures read from its table.
Changes to this page
- · Major · Rewritten and moved here from our earlier article on the Rule of 40. Benchmarks compiled 2 October 2026.
- · Major · First published as "What Is the Rule of 40, and When Does It Mislead a Board?".
Cite this page
Dominique Bouillet, "Rule of 40: calculator, formula and 2026 SaaS benchmarks", CX Cash, updated Oct 6, 2026, https://cxcash.com/metrics/rule-of-40
CX Cash builds software for founders and investors. This page is education, not investment advice. Third-party figures link to their source, and our own arithmetic and illustrative examples are labelled as such.