How much is your software worth?

My consulting company Zeidman Consulting worked on a large tax case last year. For reasons involving the labyrinthine regulations of the IRS, it was important to understand how much of the IP of a software program had changed from the time it was first developed ten years ago, through subsequent revisions, until the current version. In the current version, IP remaining from the first version was taxed at one rate while IP added subsequently was taxed at a different rate (this is a simplification based on my limited understanding of tax law). There was a lot of money at stake.

Previous methods of measuring code involve counting lines of code. However, that’s a very poor estimate. Consider an example where an entire function consisting of 10,000 lines of code is replaced with a more efficient function requiring only 9,000 lines of code. Simply counting lines would tell you that there was a net reduction of 1,000 lines of code, which could incorrectly be interpreted as a reduction in IP. We realized that we could use CodeDiff and FileCount to compare lines of code to find the number of lines of code that continue from one version to another, the number of lines of code that are changed, and the number of lines of code that are added. Plugging these values into a well-defined spreadsheet allow you to graph this measure of changing lines of code (“CLOC”) over time. The actual valuation of the initial version of the software is a complex process better left to financial analysts, but the CLOC method provides a great way to measure the changes in value.

You can read more about CLOC in the article by Nik Baer and me in Intellectual Property Today entitled Measuring Changes in Software IP including a measurement of the Mozilla Firefox open source project.