Valuing Source Code: A Comprehensive Guide
This article is a comprehensive guide to source code valuation.
Source codes have been around for a while, but they were not as widely used and as prevalent as they are now. This is the era of technology and innovation which brings with it new software to ease business. Businesses in all sectors have long realised how essential software is to their operations. Recently, they have started to understand and acknowledge that the source code is the most important part of their software and that it must be treated carefully because it determines how the software will behave and operate. Knowing about source code valuation, its mechanism, its importance and more details about a source code, thus, becomes extremely important for contemporary businesses. This article is a comprehensive guide to source code valuation.
Source code valuation
One of the most difficult challenges that software developers confront is maintaining source code. In a 2020 Sourcegraph study, 51% of developers claimed to have more code today than they had ten years ago, and 92% claimed that the demand to deploy software more quickly has increased. Costs may rise as low-quality codes enter production environments as a result of the expanding responsibilities. This gives you all the more reason to have a thorough knowledge of source code valuation. Let’s start with what a source code is.
What is a source code?
The set of instructions and statements created by a programmer in a computer programming language is known as a source code. A compiler then converts this code into machine language, which is called object code. A source code is the foundation of a computer programme. It includes declarations, commands, instructions, functions, loops, and other statements that serve as guidelines for how the programme should run. One or more source code text files, which can be kept on a computer’s hard drive, in a database, or printed in books containing code snippets, may be present in a programme.
How does a source code work?
Take a look at this simple source code illustration:
<em>#include < stdio.h >
int main( )
printf(“contact us”) ;
The C programming language is used in this illustration to create a single line of source code. Many programmers choose to write their source code in C or C++ programming language as it enables them to write simple lines of code that provide basic commands. The code in this example reads “print” instructing the computer to print the quoted text. The text “contact us” would appear on the screen if a programmer compiles the source code and applies it to a website.
Translation or compilation of the source code into machine language that the computer can understand before you can run it is necessary. A program called ‘compiler’ is used for this. Unlike source code, which humans can easily understand, translated code (object code), primarily consists of binary code (ones and zeroes).
Importance of source code
Source code is vital for software development as it serves as the fundamental framework for software development. This attribute of source code also applies to other scenarios. Source code, for instance, enables editing, customisation, or further software development. Even if you have the program on your computer, doing these tasks without the source code would be impossible.
A program’s source code enables numerous people to co-develop software, saving time and energy as multiple developers can work on software. It also makes it simpler to create equivalent software for different operating systems.
Companies who desire to maintain their existing practices independent of the software can benefit from source code. A source code ensures that the software adapts as the company’s needs evolve.
Valuing source code tactics
Theoretically, the source code price would depend on the effort put into the building of the application. If one person worked continuously for three months (including weekends) to construct the app and the average hourly rate for a freelancer doing this is $100 (after all taxes), then 100 * 8 * 30 * 3 = 72,000. This implies that this programme can be sold for $72,000.
Practically though, the demand drives the price. You can give up your app’s source code for free if no one is interested; nothing will change. On the other side, the price will increase if a wealthy corporation is interested in your programme.
So how to do value source code cleverly? Keep the following tactics in mind.
Treat it like a business
Selling an app’s source code is quite similar to selling a business. Price is calculated using the formula: revenue * 3 + assets. The number three is a supply and demand multiplier. Businesses rely on evaluations when they don’t have a revenue history. The multiplier is applied to the evaluation, which is an estimate of the predicted revenue.
Let’s look at a real-world example. Binpress, a marketplace for source-code components, had a very low initial source code price ($4.999) for one of its components (import and export rules module for Magneto). The company observed that the source code was gaining popularity. They advised the developer to increase the source code price.
The developer initially increased the price to $9.99, which did not affect sales (i.e., the conversion rate remained the same). Then, he increased it to $14.99, which had a similar effect. Finally, the price was raised to $19.99, and sales started dipping slightly.
Hence, the optimal price point here was more than three times the original price, between $14.99 and $19.99. In a nutshell, the developer would make over three times as much money by simply adjusting the pricing without actually altering the product.
Get back inside your head
An important tactic to get the deserved price of your hard work is to control your psychological intuitions and instead become rational. Try to understand why someone wants to buy your code from you. In case it’s business, they very clearly want to buy your code to make money.
Keep in mind the equation: Price Paid = (Buyer Perceived Value-Seller’s Cost) * Negotiation.
Everything ultimately comes down to negotiation. Find the middle ground between your minimum price and their maximum offer.
Another tactic that works is asking them the price they would settle for immediately. In many cases, the potential buyer will be straightforward in stating the maximum price they can offer for your source code. You will get to decide if you are satisfied with the deal and want to proceed further.
How to value a source code?
Now that you know the basic tactics to get the best price out of your source code, it is time to dive into the technical aspect of the source code valuation process. If you want to get the best source code price, you should know how to value source code.
Methods to value source code
There are many factors to take into account while valuing a source code. You could determine the true value of your company by understanding the various components of the methods or ways to value source code.
There are numerous techniques used nowadays to determine your code’s value. Here, we talk about the three most preferred ways to value source code.
- Income Approach (Relief from royalty) – The income approach is based on the notion that a company’s true worth is determined by its potential for future revenue generation. The most popular way to evaluate an asset under the income approach is capitalising on past earnings. Calculating the NPV (Net Present Value) of anticipated future cash flows or profits gives us the capitalisation of earnings. The estimate is obtained by dividing the company’s future earnings by a cap rate (capitalisation rate). This approach examines the annual rate of return, the present cash flow, and the predicted value of the firm to determine the worth of a company.
- Market Approach (Marketplace for software sales) – The market approach compares the company to other similar companies that have been sold. Unlike the other approaches, this only functions if there are enough businesses for comparison. Intangible assets, securities, and ownership stakes in businesses can all be valued using this method. The market technique analyses the sales of every comparable asset, regardless of the asset being valued, and adjusts for any differences in quality, quantity, or size.
- Asset-based approach (Historical Cost & Cost to reproduce) – The asset-based approach of source code valuation focuses on the company’s fair market value (FMV), also known as its net asset value (NAV). To calculate the cost of recreating the code, subtract the total assets from the total liabilities. The assets are examined, and each asset’s fair market value is established.
Consider this illustration: To determine the fair market value of a parcel of property, a landowner may consult with a real estate appraiser. And with this, the owner can learn that the property he purchased for $2 million ten years ago is now worth $4 million. Following this, the land would be reassessed at $4 million using the net asset value approach.
Why is valuing a source code important?
If you don’t know the value of your source code, on which you spent all your programming skills, it becomes worthless. In Bill Gates’ 1976 publication, ‘open letter to Hobbyists’ he accused computer hobbyists of depreciating his source code by disseminating it. He was right to call such hobbyists out, as you would not want something you spent days and nights working on to get devalued. As we have already talked about in this article, selling source code is like selling a business. You can’t sell a business without valuing it first. Business valuation is a necessity for your product to grow, and so is source code valuation. You want the accurate value of your code if you want your hard work and smart work to pay off.
How can you negotiate your source code with investors?
Establishing your negotiation goals is the first stage in negotiations. Determine what you want to accomplish and how much money you need for selling your source code. You can begin preparing for the negotiation once you have a clear knowledge of your objectives.
To negotiate your source code with an investor, you must first wait and listen. Never present your term sheet in advance. Before presenting your ideas and terms, wait to hear what the investor has to give. In light of this, pay special attention to what worries and motivates the investor to invest in your source code.
Inquiring and comprehending an investor’s viewpoint will help you negotiate more skillfully. If you have got your source code valued by a trusted valuation service provider, negotiations will get much easier. You will have a technical and factual basis, i.e., the source code valuation, to ask for the best price of your code.
Get a valuation from Eqvista!
A source code is the key component of any software. In today’s era, it has become a growing demand in the market and is sought after by many organisations. Thus, if you are a programmer or a seller of source code, you need to get a comprehensive and accurate source code valuation. Eqvista has an expert valuation team which provides cost-effective and top-notch valuation services. With us, you can be rest assured to get the best valuation of your code. So get in touch now to get accurate source code valuation from the expert team of Eqvista!