Rule of 40 Calculator
Revenue growth plus EBITDA margin against the 40 threshold — with the composition of the score alongside it, because a company clearing 40 on growth and one clearing it on margin are not the same business and are not valued as one.
Free · No signup · Runs entirely in your browser
Growth rate plus EBITDA margin, against a threshold of 40. Every rule of 40 calculator does that addition. This one also reports what the score is made of, because two companies can hit 40 the same way on paper and be worth very different multiples.
Year-over-year recurring revenue growth.
Negative is normal at high growth.
To clear 40 you would need margin at 15% on today's growth, or growth at 32% on today's margin. The formula treats those as identical. Almost nothing else does — margin is usually the one a company can move within a year.
Growth is carrying the score. That is the version investors pay most for, and the version that unwinds fastest — the day growth slows, the margin has to appear from somewhere, and it rarely appears quickly.
EBITDA margin is the convention rather than operating income, because most growth-stage companies are barely profitable on GAAP measures and the rule would classify all of them as failing. That also makes it easy to flatter: what sits inside EBITDA is a choice.
Both halves of the score come from shipping the right things faster. If you are building the product largely on your own, Tekk turns what you want into specs your coding agent can actually execute.
The formula
Rule of 40 = revenue growth rate % + EBITDA margin %
Forty or above passes. That is the entire calculation, and it is why every page on this subject agrees on the arithmetic and differs only in what it says afterwards.
The rule is attributed to Brad Feld, and its purpose is to stop either half being judged alone — growth without regard to what it costs, or profitability without regard to what it forgoes.
Worked example
| Growth | EBITDA margin | Score | Verdict |
|---|---|---|---|
| 20% | 20% | 40 | Passes exactly |
| 25% | 8% | 33 | Seven points short |
| 60% | −15% | 45 | Passes on growth alone |
| 5% | 35% | 40 | Passes on margin alone |
The third row is the one people find surprising, and it is deliberate: a company growing 60% is allowed to lose money and still be healthy by this measure. That is the flexibility the rule was built to express.
Why EBITDA and not operating income
Because the rule would otherwise fail almost everyone it was designed for. Most growth-stage companies are unprofitable or barely profitable on GAAP measures, so a version built on operating income would classify the entire category as failing and tell you nothing.
The cost of that choice is that the margin half is the easy half to flatter. EBITDA excludes depreciation and amortisation, so capitalising development spend rather than expensing it lifts the margin without a dollar of cash changing hands. Checking the score against free cash flow is the fastest way to find out whether it is real.
The composition is the part that matters
These two companies score identically:
| Company A | Company B | |
|---|---|---|
| Growth | 55% | 5% |
| EBITDA margin | −15% | 35% |
| Rule of 40 | 40 | 40 |
They are not the same business and nobody values them the same way.
- Growth-led scores attract the highest multiples, and unwind fastest. The day growth slows, the margin has to appear from somewhere, and it rarely appears quickly.
- Margin-led scores read as safe. Profitable and slow is a real business, and it usually trades at a lower multiple than the alternative.
- Balanced is the most durable, and the least likely to be sharply re-rated in either direction.
A single number that treats these as equivalent is hiding the most useful thing on the page, which is why the composition is reported alongside it here.
The levers are not equal
If you are seven points short, the formula says you need seven points of growth or seven points of margin. Arithmetically true, practically misleading.
Margin is the one most companies can actually move inside a year — a hiring pause, a renegotiated contract, a cut line of spend. Seven points of additional growth is a different kind of promise, and one that has to be made to a market rather than to a spreadsheet.
Worth deciding which you are committing to before someone else decides for you.
How it works
- 1
Enter growth and margin
Year-over-year recurring revenue growth and EBITDA margin, both as percentages. Negative margin is normal and expected at high growth — the rule was designed to accommodate exactly that, which is why it uses EBITDA rather than operating income.
- 2
Read the score against 40
The two add up. Forty or above passes. This rule of 40 calculator also shows how far short a failing score is and what either lever would have to reach on its own, since the formula treats them as interchangeable.
- 3
Then look at the composition
The part no simple calculator reports. A 40 built from 55% growth and −15% margin, and a 40 built from 5% growth and 35% margin, are the same number attached to entirely different companies — and the market prices them differently.
Frequently asked questions
- What is the Rule of 40?
- A SaaS health check popularised by the venture capitalist Brad Feld: revenue growth rate plus EBITDA margin should total at least 40. It exists to stop a company being judged on growth alone, or on profitability alone, when the two trade against each other.
- How do you calculate the Rule of 40?
- Add the two percentages. A company growing 20% with a 20% EBITDA margin scores 40 and passes. One growing 60% with a −15% margin scores 45 and also passes — high growth is allowed to buy negative profitability, which is the whole flexibility of the rule.
- Should I use EBITDA margin or net margin?
- EBITDA, by convention. The reasoning is practical: most growth-stage companies are unprofitable or barely profitable on GAAP measures like operating income, so a rule built on those would classify almost the entire category as failing. It also makes the number easy to flatter, since what sits inside EBITDA is a choice.
- Does a saas rule of 40 calculator need to show composition?
- Yes, and this is where a bare saas rule of 40 calculator stops being useful. Growth-led scores attract the highest multiples and unwind the fastest — the day growth slows, the margin has to appear from somewhere. Margin-led scores read as safe and are typically valued at a lower multiple. Balanced is the most durable.
- Which lever is easier to move?
- Margin, almost always, and the formula gives no hint of that. Both levers cost the same number of points arithmetically, but a company seven points short can usually find seven points of margin within a year and rarely finds seven points of growth. That asymmetry is the useful thing to know before choosing which one to promise.
- What is a good Rule of 40 score?
- Forty is the bar, not the target. Public SaaS companies clearing 40 consistently are a minority, and scores above 60 are rare enough to attract attention on their own. A rule of 40 calculator will tell you the number, not the story: below 40 is not a failing grade so much as a prompt to explain which lever you are pulling and when.
- Does the Rule of 40 apply to early-stage startups?
- Not really. At a few million in revenue, growth percentages come off a base small enough to make them almost meaningless — tripling from $1m is easier than adding 20% to $100m. The rule is most informative from roughly $10m of ARR upward, which is also where investors start applying it.
- Can the score be gamed?
- Easily, and mostly through the margin half. EBITDA excludes depreciation and amortisation, so capitalising development costs rather than expensing them lifts the margin without changing the cash. Comparing a company's score to its own free cash flow is the quickest way to see whether the number is real.
- What if my score is negative?
- Then growth and margin have cancelled out or worse, and the rule has nothing useful to say. There is no composition to report because there is no positive total to divide. The questions at that point are more basic than any benchmark.
- Is the Rule of 40 still relevant?
- More than it was in the zero-interest era, when growth at any cost went largely unquestioned. What a rule of 40 calculator captures is that it refuses to let either half be ignored, which is exactly the discipline that gets abandoned first when capital is cheap and demanded first when it is not.
- Do you store the numbers I enter?
- No. The calculation runs entirely in your browser. Nothing is sent to a server, nothing is logged, and there is no account. Disconnect from the internet and it will still work.
- Why is this free, and what is Tekk?
- Tekk is a spec-driven development platform for people building software with AI coding agents. This calculator costs us nothing to run, and both halves of the score ultimately come from shipping the right things faster. No signup, no run limit, no upsell inside the tool.
Want a real spec for what you’re building?
Drop a sentence. Tekk grounds it in your actual code and turns it into an executable plan.
Free to try · Connect GitHub during signup