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Virtual Data Room Guide: Everything You Need to Know

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This guide is for professionals who want to familiarize themselves with virtual data rooms. Perhaps you’re new to the field of investment banking or transactional law, and your colleagues keep talking about “the VDR.” Or maybe you’re a business owner who is considering selling your company, and your M&A advisor has recommended a virtual data room to you to help facilitate the bidding and due diligence process. In the sections below, we will get you up to speed on what a virtual data room is, what it’s used for, who needs it, and why.

What Is a Virtual Data Room?

A virtual data room is “an online repository of information that is used for the storing and distribution of documents.” These documents can be organized, shared and tracked all within the data room administrators’ control and discretion. Virtual data rooms are ideal for supporting complex projects and business processes that require the disclosure and sharing of confidential documents with third parties beyond the firewall.

VDRs have become an established solution for sharing sensitive financial documentation, intellectual property, case files for litigation, and so on. A virtual data room also provides detailed activity tracking, allowing its users to view which documents have been accessed by whom. In addition to aiding in security audits, this granular information about users and document activity is especially beneficial during sell-side M&A transactions or fundraising because it allows users to gauge the level of interest shared documents are inciting with bidders or potential investors.  

In the old days before the cloud and Software-as-a-Service (SaaS), data rooms were physical rooms in which documents for due diligence were stored and shared. Anyone working on an M&A deal who wished to view pertinent documents would have to book specific times in advance, and physically go to the data room.

Physical data rooms were once used to control the disclosure of documents.

In the early 2000s, virtual data rooms emerged as document storage and sharing transitioned online and from physical to electronic files. VDRs were a less costly and time-consuming method of housing and disclosing confidential company documents in a controlled manner.

Although VDRs were originally designed for M&A transactions, and are still used for M&A due diligence, they are now trusted for a broad range of use cases that require secure document sharing. We’ll further explore the various use cases for a VDR below.

Why Would You Want a VDR?

The greatest advantage of a VDR is the peace of mind that comes from knowing that your confidential information—financial and HR information, intellectual property, your clients’ legal documents—will not be seen by third parties unless you’ve granted them permission to do so. A VDR’s capabilities to upload large volumes of documents, track and audit user and document activity, and set specific user permissions are vital for facilitating efficient and secure document sharing. To put it simply, organizations trust the VDR to keep their most sensitive documents safe.

VDRs are widely used in the following industries:

Investment Banking — Investment banks and advisors rely on VDRs to keep M&A deals moving and streamline due diligence for mergers and acquisitions.  

Litigation — Legal firms use VDRs to share privileged documents with their clients, legal teams and third parties for business transactions and litigation.

Corporate — Anytime corporations need to share confidential documents beyond the firewall, they can trust a VDR to enable document sharing with security and ease.

Funds & Private Equity — Funds and PE firms will often use a VDR service to communicate and collaborate with limited partners, auditors, and portfolio companies.

Biotech/Pharma — Biotechnology and pharmaceutical firms depend upon data rooms to securely share intellectual property and clinical trial data with third parties without having to worry about the risk of security breaches or leaks.

Mining & Energy — Mining, oil & gas. and renewable energy companies must routinely share large documents for M&A, financing, joint ventures, environmental audits, impact assessments, and bid management. A VDR simplifies these mission-critical financial and regulatory processes.

Whenever professionals need to share confidential documents beyond the firewall, a VDR is an ideal solution. Complex permission settings also ensure that only the right people will view the right data at the right time, and an intuitive user interface allows for quick navigation through folders and files, so third parties can quickly find the documents they need to review.

These specialized capabilities, designed specifically for professionals, have made the VDR an indispensable tool for supporting complicated business transactions and mission-critical processes where the safe and efficient sharing of files is necessary to facilitate successful outcomes.

Later we’ll drill down into some of the specific processes that a VDR supports.

VDRs vs. Generic File Sharing Services

Generic file sharing services such as corporate email, Dropbox or Google Drive might seem like comparable options, however, they are not sufficient for protecting an organization’s most sensitive information.

Compared to the professional capabilities of a VDR, generic file sharing services make large-scale document sharing complicated, inefficient and difficult to navigate. VDRs are purpose-built to share thousands of documents and highly structured folders with 3rd parties securely and safely. This ease of use allows organizations to avoid any unnecessary delays during important deals or processes.

The basic permission settings found in generic file sharing tools make it all too easy to accidentally share data with the wrong people, compromising yours or a client’s confidential information. They also don’t provide the detailed tracking, auditing and reporting that professionals require to monitor user activity and document security.

Investing in a virtual data room offers you specialized security and control features, as well as compliance with international security standards such as GDPR, SOC 2, and HIPAA, as well as a polished, professional appearance when dealing with other companies. Because of their robust bank-level security, virtual data rooms, unlike generic file sharing services, are typically not restricted by security-conscious companies and CIOs.

What Does A VDR Have To Offer?

These are the core capabilities a VDR provides for supporting transactions and mission-critical processes including diligence, compliance, and litigation.

Security

Broadly speaking, virtual data rooms offer a level of security similar to that of financial institutions and major banks. When you invest in a VDR, you are paying for the utmost security for your sensitive documents. These are some of the security capabilities and compliances that will ensure that your confidential information is safe and secure. Multiple physical data centers implement key card access along with fire control and multiple backups.With major internationally recognized security compliances, and customizable user permissions for complete control, the documents you share via the VDR are only accessible by the right third parties at the right time. And of course, all data is encrypted at rest and in transit and protected behind multiple firewalls to mitigate the risk of a breach.

Control  

The specialized features of a virtual data room are designed to reduce the risk of human error by allowing a user to ensure that the right third parties can view the right documents at the right time. Various security measures can be configured at an administrator’s discretion, including:

  • Disable print/download
  • Dynamic watermarks
  • Document expire

Customizable permission settings—either user or group-based— allow control over who has access to certain documents within the data room. Before a document is shared, an administrator has the option to set an expiration date and time or revoke access remotely at any point during the transaction for digital rights management.

A VDR administrator can decide to watermark every page of an electronic document or spreadsheet, and/or opt to completely disable print or download features to avoid leaks or unwanted document disclosure. These options allow you to find the right balance between security and ease of use for the guests you invite to the data room to review documents.

Activity reports allow an administrator to track and audit the activity of users or documents. This is especially helpful during sell-side M&A transactions since an advisor is able to determine the level of interest their documents are inciting in potential buyers.

Ease of Use

When a business process or transaction requires sharing and reviewing thousands of documents, how well those files are organized and how easy they are to access is critical. Highly structured folders and files must comply with strict guidelines for how they are organized and numbered. This is so multiple counterparties and reviewers involved in the process can access and review the documentation in a fast and efficient manner. Well-organized and clearly numbered folders go a long way toward helping reviewers find the files they need to review; search and versioning also help avoid delays and keep the process moving. For the VDR administrator who is managing the transaction or process, the bulk file upload process must be fast and intuitive.

VDRs enable easy and secure access to confidential documents anytime, anywhere.

Document sharing within a virtual data room is made easy with folder templates such as due diligence checklists and drag-and-drop upload abilities. These features save time and energy when populating a data room with documents and building complex folders structures. When thousands of documents, including numerous large files, need to be uploaded and shared, it’s easy to see why you wouldn’t want to have to manually organize all of this information in the data room from scratch.

For intricate transactions that involve revisions to documents, versioning is a helpful tool that makes the latest versions of documents easy to find and review. Third parties know that they are reviewing the latest greatest version of a document and aren’t wasting their time wondering if they have the correct version of a document.

If you’ve ever tried to quickly find a specific version of a file in a crowded Dropbox or drive, you’ll understand why this is an important feature. Additionally, Q&A abilities foster communication between users within the data room. Administrators can efficiently organize and control the Q&A process among multiple parties without having to resort to email. Questions and answers can be sorted based on folders or groups, priority levels can be set, and reports can be generated to show the questions that have been asked and who has asked them. A Q&A tool allows an administrator to efficiently manage questions and answers from counterparties and avoid time wasted answering redundant or repetitive questions.

Some vendors offer an annual, unlimited-use subscription contrasted to a single use transaction. If you are planning to open more than two data rooms then it might be more feasible to opt for an annual subscription. This option brings advantages like the ability to start and pause projects at will, and open as many data rooms as needed for various projects and use cases. With a subscription, there is more predictability with the cost of the VDR and you can rest easy knowing you already have a data room “on standby” and ready to go.

Which Industries Use Data Rooms and How?

While the potential uses of a VDR are virtually unlimited, data rooms have proven to be extremely useful for the use cases and processes listed below:

Due Diligence

The critical due diligence phase of an M&A deal involves sharing a large number of confidential documents with one or more parties in a secure environment. A VDR provides a powerful way for investment bankers and advisors to manage their M&A deals, and make diligence faster and easier for everyone involved.

Compliance, Audits & Regulatory Reporting

While regulatory requirements differ across industries and from country to country, the majority of compliance projects share a common workflow that requires the sharing of documents between a company and numerous third parties including business partners, external auditors, and regulators. Here’s how a VDR helps streamline the compliance workflow:

  • Whatever your industry, there is a regulatory requirement that needs to be filled. This requirement is typically outlined as a checklist of items you need to provide documentation for.
  • This checklist can be imported into the VDR using an Excel import. Each checklist item is labeled as Required, Not Applicable, or Assigned to a team member or department.
  • Your team uploads supporting documents for each applicable checklist item. The audit team is notified as soon as documents are uploaded to the VDR. Auditors may comment on documents or ask questions, all within the safe space of the VDR. Revised documents may be added as new versions.
Compliance requires the sharing of sensitive documents with third parties beyond the firewall.

RFP & Procurement Projects

A Request for Proposal (RFP), Request for Information (RFI) or procurement project requires the exchange of detailed specifications and documentation. A VDR can be used to host all of your project materials for your RFP/RFI or procurement project in one secure place and facilitates Q&A with your bidders within the VDR platform. Using the VDR you’ll:

  • Present bidders with project materials
  • Communicate bidding instructions
  • And host a facility for Q&A

Litigation

For law firms, a virtual data room supports the two-way sharing of privileged documents between your litigation team and your client, as well as handling contributions from external experts and other outsiders involved in the litigation. Documents are centralized and kept secure, even when leaving the firm’s firewall. A VDR also allows you to track user and document activity for peace of mind.  

Sharing Intellectual Property (IP)

For many companies, intellectual property and proprietary information are the lifeblood of their business. A VDR makes sensitive information related to intellectual property available to external parties outside the walls of the organization without putting your IP in jeopardy. For example, biotech and pharma companies rely on VDRs to safely share their highly confidential formulations, molecules and patents with external labs and regulators during clinical trials and as part of fundraising and licensing.

LP Reporting / Investor Reporting

Private Equity firms and Funds can use a VDR to share portfolio information, tax information and fund documents in a professional and transparent manner. The virtual data room maintains a level of organization which promotes the accuracy and legitimacy of the information they are sharing. Reporting is a recurring function, and using a VDR makes the required documents accessible 24/7 to investors so that they can get all the information they need anytime, anywhere.

Portfolio Company Reporting

A virtual data room provides a place for portfolio companies to upload their monthly and quarterly reports. With a VDR they are able to showcase the strengths and capabilities of a business in an organized manner with interested third parties. Folder level security and user permissions make finding the right information quick with so many company’s documents being constantly shared. Reviewing all these documents is made easier with bulk downloading so that communication with investors is fast and efficient.

Finding A VDR Service That’s Right For You

With a number of VDR providers in the market, how can you compare VDRs and find the right one for your business? As with any software or service, you’ll need to wade through a lot of industry jargon and marketing messages to strip a given VDR service down to its core.

Unbiased testimonials on third-party review sites are a great way of deciphering the genuine experience clients have had with a VDR provider. Reading the real-world experiences of peers in your industry can shed some light on what you can expect from a VDR service in terms of functionality and support. You’ll probably notice that certain VDRs continuously crop up due to their good customer service, competitive pricing, and time-saving proprietary features.

Another way to really know what a provider will offer you is to use their free trial periods to kick the tires. This will help you grasp how their platform performs in practice and if the features match your business requirements. Along with demos, most providers offer a free trial for a full picture of what their virtual data rooms can accomplish.

When you’re considering a VDR service, there are two main considerations:

Virtual Data Room Pricing

The pricing of VDRs differs between providers. While not all vendors offer the same pricing structure, the cost of a virtual data room is typically determined by the number of users, length of the deal, amount of data being stored (e.g. the number of documents), and in some cases the number of pages to be uploaded. Per-page pricing is a legacy holdover from the days of physical files and data rooms and can cause confusion when an organization is trying to determine their data room storage needs.

Vendor Support

Because you’ll be reliant on the VDR to close a deal, and/or to support, simplify and streamline one or many mission-critical processes, the level of support you and your users and clients will receive from your vendor is a critical consideration. Virtual data rooms should offer a much greater level of support than generic document sharing services.

Because transactions and critical business processes rarely keep within a 9 to 5 workday, consider whether the vendor offers true 24/7/365 support (including evenings, weekends and holidays).

Because VDRs enable mission-critical processes, the quality of vendor support is critical.

Will the vendor’s client services representative understand the nuances of your business and have experience supporting processes like yours? Will you get a real human being on the phone when you call support, or a lot of time-consuming call center runaround instead? If you need a helping hand to get started with using your VDR, with the vendor be there for you and comprehend the urgency of getting the project up and running fast?

Simply put: Professionals are under pressure to keep transactions and processes moving, and they demand a level of vendor support and expertise that is not provided by generic file sharing services. While VDR features and functionality are undoubtedly important, never underestimate the importance of vendor support when choosing a VDR.

Summing Up

Since the 2000s, virtual data rooms have evolved into mature and highly specialized services for sharing confidential files online with professional-grade security and control. This category of technology assists companies in multiple industries that require the utmost security, control, and ease of use when sharing documents for mission-critical processes.

Hopefully, after reading this article, you’re more informed about why virtual data rooms are essential solutions for secure document sharing, and also have a sense of the differences between VDRs and what to look for when choosing a VDR service. Not all VDRs are created equal, and that differences in architecture, feature sets and architecture can have a big impact on performance, efficiency and how effectively they adapt to your processes and support your unique business needs.