Rule of 40 Calculator Widget

Put the Rule of 40 on your SaaS or investing page. Readers enter year-on-year revenue growth and a profit margin - EBITDA, free cash flow or operating - and see the combined score, whether it clears 40 and by how many points.

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Under the widget on your page: Rule of 40 Calculator by A2Z Tools

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<div data-a2z-widget="rule-of-40-calculator" data-height="460"></div>
<p class="a2z-attribution" style="margin:6px 0 0;font:12px/1.4 system-ui,sans-serif;opacity:.8">Rule of 40 Calculator by <a href="https://a2z.tools/embed/rule-of-40-calculator" target="_blank" rel="nofollow noopener">A2Z Tools</a></p>
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How it works

The rule says a healthy software company's revenue growth rate plus its profit margin should add up to at least 40%. Brad Feld popularised it in February 2015, quoting a late-stage investor who used EBITDA margin as the profit measure and suggested back-testing with operating income, net income and free cash flow. The score is a plain sum: 30% growth with a 15% EBITDA margin scores 45 and passes; 50% growth with a 20% loss scores 30 and falls short by 10 points. The idea is a trade-off: a company may burn cash to grow fast, or grow slowly while throwing off profit, but the combination should clear the bar. Growth should be year-on-year revenue or ARR growth; margins can be negative and are limited to 100% at the top. Pick the same profit measure every time you compare companies, because free-cash-flow and EBITDA margins can differ by many points for the same business.

Calculation method

  • Rule of 40 score = revenue growth % + profit margin %
  • Pass when the score >= 40
  • Profit margin = EBITDA, free cash flow or operating income / revenue; negative for a loss

Worked examples

Balanced company

Inputs: Growth 30%; EBITDA margin 15%

Result: Score 45; passes by 5 points

Growth and profit together clear the bar.

Fast but loss-making

Inputs: Growth 50%; EBITDA margin -20%

Result: Score 30; short of 40 by 10 points

Growth would need to reach 60% to pass at this level of losses.

An illustration of an industry heuristic, not investment advice.

Limitations

  • A single-period snapshot; one-off costs or a pricing change can move it sharply.
  • Ignores scale, retention and capital efficiency.
  • The 40% threshold is an industry heuristic, not a standard.

Where publishers use it

  • Public-market SaaS investing newsletters
  • Venture-capital blogs explaining growth-versus-profit trade-offs
  • CFO and FP&A content on planning targets
  • Business-school case material on software valuation
  • Board-reporting templates for growth-stage companies

Questions

Which profit margin should I use?

Brad Feld's original write-up used EBITDA margin and suggested back-testing with operating income, net income and free cash flow. Many public-market analysts now prefer free-cash-flow margin. Use the same measure for every company you compare.

Does a score of 40 mean the company is healthy?

It is a quick heuristic, not a verdict. A company scoring 45 from 60% growth and a -15% margin has a very different risk profile from one scoring 45 from 5% growth and a 40% margin.

Does the rule apply to early-stage startups?

Rarely. Below roughly 10-20 million of ARR growth rates swing widely and margins are deeply negative, so the score says little. It is mainly used for growth-stage and public companies.

Should growth be ARR or revenue?

Either, consistently. ARR growth reflects the current run rate; GAAP revenue growth lags it slightly for a fast-growing subscription business.

How should a seasonal business measure growth?

Compare trailing-twelve-month revenue with the twelve months before, not a single quarter annualised. A 10% quarter-on-quarter jump compounds to 1.1^4 = 46.4% a year and would inflate the score if one strong quarter were extrapolated.

Can the margin be above 100%?

No - a profit margin is profit divided by revenue and cannot exceed 100%. The widget refuses higher values but accepts large negative margins for heavily loss-making companies.

Sources

  1. The Rule of 40% For a Healthy SaaS Company (3 February 2015) - Brad Feld, Feld Thoughts . Original write-up: growth rate plus profit should add up to 40%, with EBITDA as the baseline profit measure. Checked 2026-10-01.

Cite or recommend this tool

If you reference this tool in an article, course or documentation, these formats are ready to copy. They are optional - nothing is added to your site unless you paste it.

A2Z Tools Rule of 40 Calculator
https://a2z.tools/embed/rule-of-40-calculator

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