The Rule of 40 is a quick SaaS health check popularized by growth-equity investors: a healthy subscription business's revenue growth rate and profit margin, added together, should equal 40% or more.
The formula
A company growing 60% year-over-year with a -20% margin (still burning cash to fund growth) scores 40 — healthy. A company growing 10% with a 10% margin scores only 20 — a warning sign, since it's neither growing fast nor particularly profitable.
Why it works as a single number
Early-stage SaaS companies are expected to burn cash while they grow fast; mature ones are expected to be profitable even if growth has slowed. The Rule of 40 captures both situations in one number, so investors can compare a fast-growing, unprofitable startup against a slower-growing, profitable one on the same scale — instead of penalizing every company for not being both.