Originally Posted by Jon Kerr

Most of the time it's measured above ride height. You set your ride height and then lift one end of the car just until the tires are just touching the surface then measure it again. The difference is your droop. If you're running 5mm rider height and you want 4mm of droop, when you lift the car it should read 9 on the droop gauge. Then once you have it set to the right height, use a droop gauge like the Schumacher Aluminum one of the Hudy one to make sure both sides are exactly the same.

Sometimes though you'll see some of Teemu's setup sheets show him measuring it with the chassis flat on the surface and measuring to the top of the axle.