Rule of 40
The Rule of 40 says a healthy SaaS company's revenue growth rate plus its profit margin should sum to at least 40%. It formalises the growth-versus-profitability trade-off in one score.
Formula
Worked example
A company growing 55% while burning at a −20% FCF margin scores 35 and narrowly fails; one growing 25% at a +18% margin scores 43 and passes.
The rule exists because growth and margin are exchangeable: markets will forgive losses for enough growth, or slow growth for enough profit, but not both at once. Public SaaS above 40 commands measurably richer revenue multiples.
Two health warnings: the margin basis must be stated (FCF, EBITDA and operating margin give different scores), and the rule is calibrated for companies beyond roughly $10M ARR — a seed-stage business failing the Rule of 40 is normal, not damning.
Compute it: Rule of 40 calculator