Rule of 40

A rule of thumb that a healthy software company's revenue growth rate plus its profit margin should add up to at least 40 percent. It balances growth against profitability.

Growth rate % + profit margin % >= 40

Why it matters

The Rule of 40 gives one yardstick for whether a company is trading growth for burn sensibly. Investors use it to sanity-check later-stage SaaS, where pure growth at any cost is no longer rewarded.

For example

A SaaS company growing 30 percent a year at a 15 percent profit margin scores 45 on the Rule of 40, comfortably healthy.

Worth your time

The Rule of 40% for a Healthy SaaS Company Feld Thoughts · article The post that popularized the rule, with the simple logic for why growth plus margin should clear 40 percent. Open feld.com →

The Data Behind the Rule of 40% Tomasz Tunguz · article The empirical follow-up, showing how the rule holds up against real company data rather than just theory. Open tomtunguz.com →

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Go deeper

See how founders actually handle this on Money, pricing and metrics, part of the Starting Up hub.

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