Good morning,
He thinks he's the best but is going to be hacked by someone better. I want his half written app stolen and used in a different app. but he's got to know its been copied without the hacker knowing that he knows.... hope thats not too confusing
Given this requirement my preferred route would be the bad guy somehow installing some form of program, either through your suggested break in or possibly through a web site that both the characters visit.
The installed program would then intercept all calls to the O/S functions that read and write to disc or possibly the network, pass them on to the intended O/S function but also write the data to separate files that could be transferred in the background across the internet to the bad guy.
Sure this method would see some unwanted files copied but any backup software would read all the source files and this would allow the bad guy to have the latest versions and as the data is being intercepted at the O/S file read level it would be at the point that it is being transferred to the application so it would unencrypted even if it was encrypted on the disc with something like Bitlocker.
If the good guy realises what is happening, he would have a date when he realised and if he left the program in place the bad guy would probably assume that he has not been noticed.
I know that in reality this would be quite difficult but it would be easy for a general audience to understand and feel comfortable with and not make too many people roll their eyes in despair. It is not all uncommon to see users "who know what they are doing" log in with admin privileges all the time and sign in with a password of 1234 and your guy could easily be one of these.
I would be cautious with the external USB disc route, any non trivial program is going to consist of a lot of source files, hundreds or thousands and as USB drives are slow nobody would use them as the working copies. The USB drive would only hold backups which are quite likely to password protected and encrypted or compressed.
To put the above into context I have a program that I sell under my own name which is about 120,000 lines of C++ code, that is roughly 10-12 paperback novels. The source files are even bigger then this may sound as they contain comments and blank lines and other bits and pieces.
As for stealing the app I agree with the others, but if you look up Windows DLLs, all other OSs have similar functionality, it may be that these would make sense for your story. The idea is that they are a self contained functionality, that can be used in other programs without the calling program understanding how they work.
Bye
Ian