# Rule of 40

*Startups & Venture Capital — Finicade finance glossary*

The Rule of 40 says a software company growth rate plus its profit margin should exceed 40 — grow fast or be profitable, but do not fail at both.

The Rule of 40 says a software company's growth rate plus its profit margin should exceed 40 — you can grow fast and lose money, or grow slowly and be profitable, but not fail at both. It became the dominant SaaS benchmark because it captures the trade-off in one number. Its weakness is that which margin you use (EBITDA, free cash flow, operating) changes the answer substantially.

**Formula:** `Revenue growth % + Profit margin % ≥ 40`

**Also known as:** rule of forty, growth plus margin

**Related terms:** [Annual Recurring Revenue](https://finicade.com/glossary/annual-recurring-revenue), [Unit Economics](https://finicade.com/glossary/unit-economics), [Gross Margin](https://finicade.com/glossary/gross-margin), [Net Revenue Retention](https://finicade.com/glossary/net-revenue-retention), [Valuation Multiple](https://finicade.com/glossary/valuation-multiple)

Source: https://finicade.com/glossary/rule-of-40