Stock pay leaves only 8 of 55 listed SaaS firms above the Rule of 40
Only 8 of 55 listed SaaS companies clear the Rule of 40 on an EBITDA basis, against 25 on free cash flow, Aventis Advisors found. Stock-based compensation explains almost all of the gap, and Andreessen Horowitz argues boards can no longer leave it out.
Context for builders, not their beat.
Bar comparison of two counts. On an EBITDA basis, 8 of 55 companies (15%) clear the Rule of 40. On a free-cash-flow basis, 25 of 55 companies (46%) clear it.
Of 55 listed SaaS firms, number clearing the Rule of 40 In companies
| Item | Value | Claim |
|---|---|---|
| Clear on EBITDA basis | 8 companies | 1 |
| Clear on free-cash-flow basis | 25 companies | 2 |
What happened
- Mean EBITDA margin across the 55-company sample is 7.3%, against a mean free-cash-flow margin of 23.0%.
- CrowdStrike's GAAP EBITDA margin is essentially zero, but a 33% free-cash-flow margin lifts its cash-flow Rule of 40 score to 55%.
- An Andreessen Horowitz essay names two paths for software: add 10+ points of growth from AI-native products within 12-18 months, or reach 40%+ operating margins including stock pay.
Why it matters
- Who has to decide decision On a16z's argument, a score that depends on adding back stock pay will not defend a multiple, so which definition a board manages to becomes a strategy choice this quarter.
- What it costs cost Getting from where the sample sits to a16z's margin bar implies cuts deeper than the layoff rounds the essay dismisses, with headcount and equity grants first in line.
- What it limits constraint If the 12-to-18-month plan has to pick growth or margin, a software company can no longer run both programs at partial strength.
- Who's exposed exposure Companies such as CrowdStrike, whose score depends on the free-cash-flow add-back, face the most repricing risk if investors start counting stock pay as a cost.
Both scores cover the same 55 companies. A board that picks a definition is therefore also picking whether it sits with the 15% or the 46% [1][2]. At least 17 companies clear the bar on free cash flow and miss it on EBITDA [16].
A skeptic would say free cash flow is the more honest measure, and Aventis does call it harder to manipulate [8]. The same write-up notes that FCF adds back stock-based compensation [8], and its author leans toward treating stock pay as a true business cost [14]. "FCF doesn't capture the share buybacks that many companies perform to keep number of shares and dilution under control," Aventis wrote [9].
Andreessen Horowitz sets a stricter bar. Its essay asks for true operating margins of 40% or more, ideally 50%, with stock-based compensation counted [10]. The sample's mean EBITDA margin is 7.3% [6], about 33 points below that bar [17]. Operating margin and EBITDA are not the same line, so that gap is only approximate. The essay describes much of the sector as "too slow to deserve a premium growth multiple, too diluted to deserve a fortress multiple" [11]. It adds that "the '8% or 10% layoff' headline no longer counts" [13].
The claim that adjusted margins no longer earn a multiple is a16z's argument. Aventis puts the sample's mean EV/Revenue multiple at 4.7x [5], but its headline figures do not show which of the two scores that multiple follows. In our view, the decision for this quarter is which definition a board manages to. The essay's author suspects the 12-to-18-month plan has to choose growth or margin, and that the ground between them will bring "growth pressure, persistent dilution, and multiple compression" [12]. A board that adopts the stock-inclusive score now is also setting next year's cost plan to meet it.
What to watch
- Whether Aventis's multiple analysis shows EV/Revenue tracking the EBITDA-based score more closely than the FCF-based one.
- Whether the count of companies clearing the Rule of 40 on an EBITDA basis moves off 8 in the next update of the sample.
- Whether software companies announce the deeper restructurings a16z expects within 12 months, or keep to single-digit layoff rounds.
Claim ledger
Ranked by verification strength, evidence, and original report placement.
- [1]
Only 8 of 55 companies (15%) in the Aventis sample clear the Rule of 40 on an EBITDA basis.
- [2]
On the free-cash-flow basis, 25 of 55 companies (46%) clear the Rule of 40.
- [3]
The gap between the EBITDA and FCF definitions, roughly 16 percentage points at the median, is explained almost entirely by stock-based compensation, which depresses EBITDA but rarely shows up in cash flow.
- [4]
The dataset covers 55 publicly listed SaaS companies with last-twelve-month financials as of 5 May 2026, listed on major U.S. or Canadian exchanges, with enterprise value above $350m.
- [5]
Across the sample, mean revenue growth is 15.1% and the mean EV/Revenue multiple is 4.7x (median 3.6x).
- [6]
Mean EBITDA margin across the sample is 7.3%; mean FCF margin is 23.0%.
- [7]
CrowdStrike's GAAP EBITDA margin is essentially zero, but its FCF margin of 33% takes its FCF-based Rule of 40 to 55%, among the highest in the sample.
- [8]
FCF is harder to manipulate, but it adds back stock-based compensation, so it is generally higher for younger companies.
- [9]
"FCF doesn't capture the share buybacks that many companies perform to keep number of shares and dilution under control."
- [10]
Andreessen Horowitz essay: the two credible paths are accelerating revenue growth by 10+ percentage points year over year through new AI-native products over 12-18 months, or rebuilding to 40%+ true operating margins (ideally 50%), including stock-based compensation.
- [11]
"too slow to deserve a premium growth multiple, too diluted to deserve a fortress multiple"
- [12]
The essay's author suspects the 12-18 month plan needs to be one path or the other; everything between will look like no-man's land: "growth pressure, persistent dilution, and multiple compression."
- [13]
"the '8% or 10% layoff' headline no longer counts"
- [14]
The Aventis author leans to the opinion that stock-based compensation is a true business cost.
- [15]
The essay's author expects much more of the 'strong form' of company redesign in the next 12 months.
- [16]
At least 17 companies in the sample clear the Rule of 40 on an FCF basis but not on an EBITDA basis.
- [17]
The sample's mean EBITDA margin sits about 33 percentage points below a16z's 40% operating-margin bar (approximate, as the measures differ).
Sources & coverage · 2 publishers
The reporting this story was synthesized from, earliest first. Every link goes to the original.
- a16z.comJan 22State of Markets | Andreessen Horowitz
- aventis-advisors.comMay 6Rule of 40 in SaaS: 2026 Data, Benchmarks and Valuation Impact – Aventis Advisors