The Rule of 40 for SaaS: one score that sets your valuation multiple
Growth and profitability in a single health check, and the lens with the widest valuation spread of all.
By Crispa · 6 min read · Updated June 2026
The short answer: The Rule of 40 says your revenue growth rate plus your EBITDA margin should add up to at least 40. A widely used weighted version counts growth twice as heavily as margin, since the market rewards growth more at this stage. This lens carries the widest valuation spread of the four, from roughly 1.6x revenue below a weighted score of 10 to about 9.5x above a score of 40.
The final lens. Where the others each isolate one signal, the Rule of 40 is the one number that captures the trade-off between them. The four-lens valuation guide shows how it sits alongside the rest.
In plain termsRule of 40your revenue growth rate plus your EBITDA margin. A healthy software business clears a score of 40.
How the Rule of 40 is calculated
The simplest version just adds the two numbers, growth rate plus EBITDA margin. A weighted version, used widely by SaaS investors, holds up best in practice:
The weighting counts growth twice as heavily as margin. At the stage most software companies are in, the market rewards growth more, so growth carries the bigger multiplier. Try it with your own numbers:
Rule of 40 calculator
Drag to your numbers. The score is exact, and the multiple is interpolated from the data. It bottoms out at 1.6x and tops out at 9.5x, so adding more growth or margin beyond those points will not move it.
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weighted Rule of 40
1.33 × growth + 0.67 × margin
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unweighted Rule of 40
growth + margin
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indicative revenue multiple
How much the multiple moves
Median EV/TTM revenue by cohort. Source: SEG 2026 Annual SaaS Report (4Q25 medians).
Close to a six-fold difference on the same revenue, the widest spread of any single lens.
There are many ways to pass, and that is the point
A score of 40 or more does not care how you get there. A company growing 45% while burning −5% passes. So does one growing 20% at a 25% margin. Both spend their money well, which is what the score really measures. A business scoring 12 does neither, and that is the warning the number is built to catch.
Many routes to a Rule of 40 of 40%
Each point is a company, plotted by revenue growth and EBITDA margin, with its weighted Rule of 40 score shown. Any point on or above the green line scores 40 or more. A and B are very different companies that both clear it; Pleo, growing fast but deeply unprofitable, sits below.
Pleo figures: Pleo Holding ApS 2025 annual report (CVR 39 11 41 27). Revenue growth about 25%, EBITDA margin about −28%, weighted Rule of 40 ≈ 14%.
What this means for you
Use the Rule of 40 to steer, not just to score yourself. If you are between 20 and 40, the weighting says a point of growth lifts your multiple faster than a point of margin, so fix growth first. And watch the trap. Cutting costs to raise margin can quietly kill the growth the formula values more, leaving your score flat. The healthiest move almost always lifts both at once.
Frequently asked questions
What is the Rule of 40 and how is it calculated?
The Rule of 40 says a healthy software business should have its growth rate plus its EBITDA margin add up to at least 40. A widely used weighted version counts growth twice as heavily as margin, multiplying growth by about 1.33 and margin by 0.67.
What multiple does a Rule of 40 score above 40 earn?
A weighted score above 40 typically commands around 9.5x revenue, versus about 1.6x below 10. That is the widest spread of any single lens, close to six-fold on the same revenue.
Growth or profitability: which matters more for the Rule of 40?
Growth, slightly. The weighted formula multiplies growth by 1.33 and margin by 0.67, so between a score of 20 and 40 a point of extra growth lifts your multiple more than a point of margin.
Sources
Software Equity Group, 2026 Annual SaaS Report (2025 data). Rule of 40 cohorts and public-SaaS revenue multiples cited throughout.
Crispa valuation analysis. The four-lens method used across this series.
Pleo Holding ApS 2025 annual report (CVR 39 11 41 27). Revenue growth and EBITDA margin used in the scatter example.
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