Formula
Rule of 40 score = revenue growth rate (%) + profit margin (%)
Rule of 40
The Rule of 40 says a healthy software company's revenue growth rate and profit margin should add up to at least 40 percent.
Worked example
Growing 55 percent a year at a −10 percent operating margin scores 45 and passes. Growing 15 percent at a 10 percent margin scores 25 and does not.
Benchmark
40 is the accepted pass line. Brad Feld, who published the rule in 2015, framed it as applying from roughly $1M of ARR upward; below that scale, growth rates swing too wildly for the sum to mean much.
The rule exists because growth and profitability trade against each other, and judging either alone rewards the wrong things. A company burning heavily can be excellent if it grows fast enough, and a slow grower can be excellent if it is genuinely profitable. Adding the two puts every company on one scale.
The margin half of the sum is quoted differently by different people: operating margin, EBITDA margin and free cash flow margin are all in circulation. The choice matters less than consistency, both across time and across any companies being compared.
It is a later-stage yardstick than most metrics founders track. A seed-stage company tripling from a small base scores absurdly well and learns nothing from it. The rule starts to bite when growth naturally slows and the question becomes whether efficiency arrived to replace it.
Related terms
Keep this number live
Plainhub computes rule of 40 from money you record in plain words, so it is current when you need it rather than the night before a board meeting.
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