By Bob Zeidman and Nik Baer of Zeidman Consulting
As software developers we have often asked ourselves, “What is our software worth?
” As expert witnesses in IP litigation, we have often been asked the same question of our
client’s software. The factors that go into determining software value are numerous and varied,
including the amount of effort involved in developing the code, amount of time debugging the code, the
complexity of the code, the degree of expertise required, the selling price of the finished program, and
the size of the market for the final product. Quantifying the source code itself is only part of the
valuation process, and there are many good methods to use.
Sometimes, though, it can be useful to measure not the absolute value of software, but the amount
of change in the software and the intellectual property it represents. In a recent tax case, the
taxes owed by a software company rested on the value of a current version of software with respect to
the value of the initial version of the software created some years back. While financial analysts argued
about the value of that initial software and the IP that the code embodied, we devised a means to
measure the changes in the software from one version to another. The measure is called Changing
Lines of Code or “CLOC.” An estimated valuation of the changes was then calculated by
combining the CLOC measurements with the monetary value of the initial IP.