Metrics
Rule of 40
Quick definition
ARR growth rate + operating margin should sum to 40%+.
The Rule of 40 is a shorthand SaaS health check: a company growing 30% with a 10% operating margin (30 + 10 = 40) is 'at rule'. It captures the tradeoff between growth and profitability and is widely used by investors and boards.
Related metrics terms
ARR (Annual Recurring Revenue)
Annualized value of your subscription revenue at a point in time.
MRR (Monthly Recurring Revenue)
Monthly equivalent of ARR, useful for month-over-month tracking.
Net Revenue Retention (NRR)
Revenue from your existing customer base 12 months later, including expansion and churn.
Gross Revenue Retention (GRR)
NRR without upsell — what you keep before expansion.
See this in action
Insights and tools where Rule of 40 shows up.
Frequently asked questions
- What is Rule of 40?
- The Rule of 40 is a shorthand SaaS health check: a company growing 30% with a 10% operating margin (30 + 10 = 40) is 'at rule'. It captures the tradeoff between growth and profitability and is widely used by investors and boards.
- Why is Rule of 40 important for startups?
- Rule of 40 is a metrics concept that matters for startup founders because it directly affects fundraising readiness, financial decision-making, or operational discipline at the stage where mistakes are expensive to undo. Founders who understand it have a meaningfully easier time in diligence, board meetings, and investor conversations.
- What category does Rule of 40 belong to?
- Rule of 40 is a Metrics term in the StartupCFO finance glossary — alongside other metrics concepts that founders, CFOs, and accountants use in daily startup operations and reporting.
- Where can I learn more about Rule of 40?
- Beyond this definition, see the related metrics terms below, or explore StartupCFO's insights and tools that put Rule of 40 in context. For specific situations, talk to a fractional CFO who can walk through your numbers.
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