Startup metrics
Rule of 40 calculator
The Rule of 40 says growth rate plus profit margin should be at least 40. It lets investors compare a fast-burning company with a slow, profitable one.
Use the same period for both inputs. Investors differ on the margin: EBITDA, operating or free cash flow margin.
How it works
A company growing 60% with a -20% margin scores 40, as does one growing 20% with a 20% margin. Both are seen as balanced.
The rule is most used for software companies above about $10 million ARR; very early companies grow too fast and erratically for it to mean much.
The formula
- GrowthRevenue growth over the last twelve months, in percent.
- MarginEBITDA or free cash flow margin, in percent (negative if loss-making).
- AddScore = growth + margin.
Worked example
35% growth and a -10% margin score 25, 15 points short of 40.
Put the numbers in your data room
Include the score and both inputs in the metrics pack, with the margin definition stated, so investors do not have to guess.
Rule of 40 calculator FAQ
Which margin should I use?
EBITDA margin is common; free cash flow margin is stricter. State which you use.
Does the rule apply to early startups?
Rarely. It is used mostly from around $10 million ARR upward.
Is a score above 40 a guarantee of a good valuation?
No, but companies above 40 tend to command higher multiples.