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Pricing a source code license

After the recent article and discussion about pricing, let me pose a slightly different question to this forum: Are there any guidelines or rules of thumb for pricing source code licenses?

Here's the situation. I'm a small ISV that has been selling software libraries for several years. These are fairly horizontal products, and customers range from one-man shops to major corporations.

The most popular library has two prices. The low-end license is $200, and the high-end license is $600.

Recently a major retailer (a household name) has shown a lot of interest in the popular library. Since I'm a small fry, they want at least a source code escrow arrangement or an outright license. I am meeting with them tomorrow to discuss it further.

I have not offered source code in the past but am comfortable doing so in this case. The question is how to price it. Are there any rules of thumb? Any lines of reasoning I should follow? I won't be able to speak to the key people until the meeting tomorrow, so I don't yet know what it's worth to them. However, at this point I'm thinking that the price needs to be at least $5k-$10k just to make it worth the time I'm spending on the negotiations. They've also been spending some time on this, are looking for a heavy-duty system, and have me meeting with 8 people tomorrow, so I presume they're ready to drop some money. I can't imagine that they'd go to all this trouble for a $600 piece of shrinkwrap software.

A couple other data points for your consideration: The library is currently a bit underpriced as it is. I plan to roughly double prices in the future. Also, I prefer the the high-price-fewer-customers approach. I already get high marks in quality and service and am trying to move toward the "premium" end of the sprectrum.

Small fry trying to make it big
Tuesday, August 10, 2004

You have to consider redistribution rights and code modifications too.  If you sell the source, you're not necessarily selling distribution rights along with it.  In addition, if they're expecting to be able to tweak it to their hearts' content, you may want to negotiate getting some of that back.

Now, if they're going to be putting this into a cell phone or other consumer device, you might have two payment models.  Maybe they can pay you $X up front and be done with it OR they can pay you 10% of $X and a *tiny* per-unit royalty.

Most of the prices I have seen for the source of libraries are usually 3-4 times the cost of the library.  It has to be a price point where they don't feel a desire to write it themselves and cut you out....

Tuesday, August 10, 2004

Along with KC's comments, pricing the value of the source should include how long it would take them to produce the equivalent, where the equivalent is their sub set of freatures from your existing set (since they may not want all of them).

The price, naturally, has to be less than that cost to redevelop.

What kind of price is acceptable is always going to depend on specific circumstances, a ratio of 50% to 66% of their development costs might be a starting point.

If you are going to allow them to create derivative products, modify the source and use the modifications, then you should make it clear what derivatives are allowed and what are not.  For instance, if the buying company is themselves bought will those rights necessarily transfer?

If its one of their horizontal competitors, you probably won't care.  If, however, its a company that competes with you then there's no way you'd want them to acquire your source.

You can create source licencing which gives them a frozen version, or if its going to be an ongoing relationship then you can offer them a maintenance licence which gives them access to updates.  However, the hidden danger in this is that you become their R&D at a cut rate price.

If they are simply taking your improvements then you can probably live with them paying a fraction of the development costs, you're getting most of the return from your regular customers.

If, however, they start badgering you for fixes or enhancements you're going to need to explicitly bill those changes.  So, your licence agreement should explicitly exclude development done by you at their behest.

You might have some difficulty in getting them to agree to a contributing back licence, where their changes are offered to you and you can make those available in your regular product.  Their enhancements might be industry specific and they wouldn't want their competitors to gain advantage from their work.

Simon Lucy
Tuesday, August 10, 2004

Whatever the market will bear, I suppose.  It really depends on who you're selling it to.  If you sell all the rights to one owner, the price should be astronomical.  If you're selling copies, the price should be significantly lower, unless you're some huge company and the codebase is really huge and well-supported.
Tuesday, August 10, 2004

My data analysis tool comes with source code.  I sell it for a bit under $2k with a license stating that buyers are not allowed to redistribute the source code and are required to keep the source code confidential (i.e. no passing it to outside companies or consultants to work on).  Also any modifications that they make are not covered by the support contract. 

Tuesday, August 10, 2004

You should not reveal a price in this meeting.  You should find out what type of licensing they are looking for and what they expect.  You should also ask how they plan on using it/what they are going to do with it.  Try to see what neighborhood they are in.  Yor initial estimation of 5-10K maybe way too low depending on their wants.  If they try to corner you on a price, tell them that since you never have sold the source before- you are talking to a lawyer to help come up with an agreement that will protect you IP and you will consider their wants and needs.  Even if you dont see a lawer up front- you should talk to lawyer to before signing any agreement.

You really dont want to name a price upfront- you dont have enough information.


Tuesday, August 10, 2004

to echo what KC said, "Never blackmail a man for more than it would cost to get you shot!"

Having said that, i would go with the escrow method.

It is pretty simple. All they are saying is that you give a copy of the source to an independent third party, usually a lawyer or some other notary. Quite common. We insisted on something similar from a supplier of some software we were plugging big time once.

That way, should you go out of business, or you suddenly decide to yank to product, or stop selling it to them after it is a runaway success, or they have spent $$ marketing it, they are covered.

You just then need to be sure that you are very clear on the contract about the specific cases or covenants that have to be violated for them to access the source from eschrow, or indeed for you to yank the said source from eschrow.

You can still get a bit of cash up front, even without releasing said source, which is your IP.

Tuesday, August 10, 2004

Might be a bit late, but you might want to brush up on your negotiating skills.

Google or get a for dummies book.

First lesson. Don't name the price first
Second lesson. Don't negotiate against yourself

Tuesday, August 10, 2004

Thanks for all the comments so far. Lots of good points and food for thought.

This company is a big retailer. Think Wal-Mart (though it isn't Wal-Mart). It resells general merchandise manufactured by other companies. It has a few house brands.

I'm not at all worried that they will compete with me. My software is technical specialty stuff that they want to use behind the scenes on their massive customer database. It wouldn't belong in products like phones, personal computers, etc. They want the source code license (or escrow) as insurance against my own company's demise. :) The license would stipulate that it would be only for their internal use, no redistribution. I'll have to give some thought to how/whether they get updates and support.

There is some risk that a techie in the group will think that he/she could quickly reproduce this software. I know for sure, however, that even $10k would be a lot less than it would cost to do it themselves. Writing the software also requires domain expertise. It may seem straightforward on the outside, but there are many tricky issues. I expect that I'll have a chance to reveal a few of those issues at the meeting.

It appears the system they want is more than what I can give them off the shelf. My software would the core of a larger custom system. They need expertise to help build such a system on their scale, so there's potential here for me to do consulting or custom development as well. The deal may wind up being a license for existing source code plus custom code and consulting.

I have other large corporations as customers, but most of them simply bought what I had on the web site and did their own integration. I rarely heard anything from them, except the occasional tech support question. Thus, I am new to face-to-face meetings with big companies about deals that could be worth tens of thousands of dollars or more. I actually like in-person meetings better and am confident that I will make a good impression, but I have to have my plan ready and avoid stepping on landmines. I will probe their thinking in the meeting and avoid committing to prices. I'll try to sell them on myself and my company, on just moving forward to the next step instead of closing on specific details.

Thanks again for all the insights. I always find this forum very informative.

Small fry trying to make it big
Tuesday, August 10, 2004

My understanding of escrow is that they don't get the source code up front, rather some condition has to be met (like you going bankrupt or sunsetting the product). That's pretty common.

Think about how much support they will want and how much it will cost them. They're going to be the big gorilla who will want you to drop everything else when they have a problem. Make sure you can provide what they will require and that they will pay a fair price for it; many companies like yours get a large (and very reliable) revenue stream from support.

Tom H
Tuesday, August 10, 2004

You should be very careful. Even if the customer's intentions are honest, consultants or staff will take the source code if it's of any value, and they will create competing products.

In the event that you went ahead, you would need specific restrictions to stop consultants getting access to the source code. For example, you could require that your source code be under controlled access that you have the right to examine.

However escrow is the better arrangement.

You might want to consider whether the requirement for source code comes from a technical guy on the team, who just wants to play with it, or whether it's backed from higher up, in which case you should be a bit suspicious. If they want to expand the capability of your product, you could and should negotiate a good role for yourself.

In cases like this, you would benefit from consulting someone experienced. (This might be a lawyer, or it might not.)

Me And The View Out The Window
Tuesday, August 10, 2004

Gut feeling is that source ought to be 10x that of the compiled libraries.

I'd be careful on the wording of the license so that they don't fork the source too much. If they're intentions are to use it if you decide to drop development, or just help debug problems, that's fine. It's when they make mods and then want you to take them back and support them that things could get tricky

muppet 2.0
Tuesday, August 10, 2004

Something that they may bring up is exclusivity. 

IOW, an exclusive license, so that you can't sell the same code to their competitors.

Obviously, you should charge more for this, but I'm sorry, I don't know how much more.

Tuesday, August 10, 2004

I have zero experience in this area, but it seems that if all they want is protection from you going bust, then you should be able to set up escrow and charge them only the administrative cost of setting it up. After all, if they get the source code you will be past caring what it costs.

David Clayworth
Wednesday, August 11, 2004

So how did it go?

Just me (Sir to you)
Thursday, August 12, 2004

The meeting went fine. Mainly they just had a lot of questions about the product. The issue of "insurance" came up at the end, almost as an afterthought, and they seemed fine with the idea of an escrow arrangement. They didn't ask for a price, and I didn't offer one. It looks as if they will probably order a high-end license and work on the escrow agreement separately. There may also be some consulting or customization work later, though it's not looking as if it will get very far into 5-figure territory.

Small fry trying to make it big
Friday, August 13, 2004

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