How the Rule of 40 is calculated
Three scores and a valuation band from four numbers. Pick an example or type your own, and every step below shows the arithmetic with your figures in it.
Worked example
EBITDA, or FCF for mature companies
2x private; 2-3x public
Leave blank to skip step 6
- Rule of 40 score35 + 540
- Pass check40 ≥ 40 ?Meets the Rule of 40pass
- Weighted Rule of 401.33 × 35 + 0.67 × 5 = 46.6 + 3.449.9
- Rule of X2 × 35 + 5 = 70 + 575
- EV/Revenue bandpasses, so the premium band8-15x EV/Revenue
- Dollar range$20M × 8 … $20M × 15$160M to $300M
What each step does
- Rule of 40: growth + margin. Growth and margin count equally, point for point.
- Pass check: score ≥ 40. A tiny tolerance (one billionth) keeps floating-point rounding from turning a true 40 into a fail.
- Weighted Rule of 40: 1.33 × growth + 0.67 × margin. Used for early-stage companies; growth counts about twice as much as margin.
- Rule of X (Bessemer Venture Partners): multiplier × growth + FCF margin. Only the growth term is multiplied, typically 2x private and 2-3x public.
- Band: 8-15x EV/Revenue if the standard Rule of 40 passes, 4-6x if not. These are historical rules of thumb.
- Dollar range: ARR × band low to ARR × band high, rounded to whole $M.
Five companies, same rules
Computed live at the multiplier set above.
| Company | Growth | Margin | Rule of 40 | Weighted | Rule of X (2x) | Band |
|---|---|---|---|---|---|---|
| Company A | 35% | 5% | 40 | 49.9 | 75 | 8-15x |
| Company B | 5% | 35% | 40 | 30.1 | 45 | 8-15x |
| Hyper-growth | 60% | -20% | 40 | 66.4 | 100 | 8-15x |
| Balanced | 20% | 20% | 40 | 40 | 60 | 8-15x |
| Below 40 | 5% | 30% | 35 | 26.8 | 40 | 4-6x |
Companies A and B both score 40, so the Rule of 40 cannot tell them apart. Rule of X separates them because it multiplies only the growth term.
Things to know
- The verdict uses the standard Rule of 40. The weighted score and Rule of X are shown for comparison and do not change the band.
- Rule of X is a ranking. No published cutoff or multiple band exists for it, so it does not set a valuation.
- Blank fields. Blank growth, margin or ARR count as 0; a blank multiplier counts as 2.
- Today's ARR. The dollar range values current ARR. Valuing a future exit needs ARR grown to that date.
From a score to an exit
- The calculator
- Scores one company today: today's ARR, fixed bands, nothing saved.
- The CapStack model
- Grows ARR to the exit year (ARR × (1 + growth)years), values it at the band midpoint with editable bands, then runs that exit through the cap table's liquidation preference waterfall and the fund's MOIC.
Not investment advice. Valuation bands are historical rules of thumb, not a pricing model.