Rule of 40
Definition
A benchmark for software company financial health calculated as revenue growth rate plus profit margin, where profit margin is typically expressed as EBITDA margin or free cash flow margin. A score of forty or above is generally considered to indicate a healthy balance between growth and profitability. The Rule of 40 is applicable to Growth Stage and Scale Stage recurring revenue software businesses and is not applicable to pre-revenue or very early-stage companies.
Common Misapplication
The most common misapplication is applying the Rule of 40 to companies below Growth Stage, where the metric is not meaningful because revenue is too small to produce a stable growth rate and profitability is not expected.
FFI Standard Reference
This term is defined and applied in Book 2, Section 2.5: The Cost Structure Standard.
Related Terms
Citable URL
This term may be cited using the following permanent URL.
Full citation format: Founder Financial Infrastructure Standard, Beta v0.5, Glossary: Rule of 40. https://ffistandard.org/glossary/rule-of-40/. 2026.