The Rule of 40 states that a SaaS company's revenue growth rate and profit margin (usually EBITDA or free cash flow margin) should add up to at least 40%. A company growing at 60% YoY can burn at −20% margin. One growing at 20% needs to run at 20%+ margin.
It is a quick heuristic investors use to balance growth and efficiency — particularly useful for comparing companies at different stages. As growth rates slow naturally with scale, the margin component must rise to compensate. Companies consistently above 40 are considered efficiently run; consistently below 30 triggers questions about unit economics.