What is Rule of 40?
Definition
Rule of 40 states that a healthy SaaS company's growth rate plus profit margin should equal or exceed 40%.
Formula
Rule of 40 = Revenue Growth Rate % + Profit Margin %
Example:
Growth Rate: 50% | Profit Margin: -10%
Rule of 40 = 50% + (-10%) = 40% ✓
Why It Matters
The Rule of 40 balances growth and profitability. Fast-growing companies can be unprofitable (50% growth, -10% margin = 40). Slower-growing companies must be profitable (20% growth, 20% margin = 40).