What is a Data Room?

Documentation is crucial to any business. For example, it keeps a record of business dealings and contracts, provides governance, and proves compliance with local and international laws. 

However, like with any important files, security is one of the greatest concerns. Data rooms were invented to help keep documentation confidential. So, what exactly is a virtual data room? 

A data room is a specially curated environment that stores legal, sensitive, and/or confidential business documents. Security measures and special management practices provide a protected environment where business dealings can be discussed, sensitive files can be shared and viewed, and operational decisions can be made privately. Physical data rooms have been used for decades to conduct business dealings.

However, physical data rooms are slowly being replaced by online data rooms — a cloud storage solution that allows people to access sensitive documents securely. How can such a software solution benefit your business?

Why use a data room? 

Storing documents on in-company servers without proper security measures in place presents a great security risk. Hackers are always on the lookout for weak security points. Without the necessary infrastructure in place, they might gain access to your most important documents. 

Besides, when you want to share your business documents, it’s often better to use a neutral, off-site (or virtual) location.  A data room provides an impartial space that facilitates business dealings without pressure. 

Virtual data rooms VS. physical data rooms 

Naturally, data rooms can be physical and virtual. A physical data room is literally a walk-in room with piles of documents stored. To access such an offline repository, you or investment bankers would need to physically enter the building and detailed logs of all entries would be kept.

Running such a physical data room is quite expensive. That’s one of the reasons why modern businesses opt for VDRs. A virtual deal room is considered to be a cheaper and more efficient solution. Moreover, virtual data room services offer enhanced security, and that’s why they’re widely used in many industries: from investment banking to medicine.

What is document sharing?

Document sharing is a practice of giving access to digital information or resources, including various files: from media and e-books to business plans and computer programs.

When it comes to virtual data rooms, this is exactly the solution for the secure sharing of sensitive and confidential documents. Modern VDRs offer a pile of features aiming to ensure a safe environment for document sharing. Fence-view, personally-identifiable watermarks, and redaction are just a few common services that make virtual deal rooms more preferable than their physical counterparts.

What’s the difference between a virtual data room and cloud storage?

Even though a virtual data room is cloud storage by nature, there’s a substantial difference between data room providers and cloud repositories such as Google Drive or DropBox. Virtual data room solutions grant businesses and companies a higher level of security when it comes to sensitive documents and confidential data.

What’s more, a data room provider offers a number of features that aim to make the collaboration between users smoother and more efficient. These usually include redaction, watermarking, optical character recognition (OСR), document translation, chatting inside the virtual data room, and more. 

What is a due diligence process, and how is a virtual data room helpful during it?

Due diligence is roughly a process of collecting and analyzing information before making a decision. It’s specifically the case for the investments field.

Prospective investors will expect to review all the company’s numbers before the deal to evaluate its potential. In the same way, an acquirer will conduct research on the target business before a merger and acquisition (M&A) transaction.

And this is exactly where virtual data room software will come in handy. With its help, all the parties involved will manage sensitive documents in a controlled environment without the risk of a data breach.

Considering the fact that India has already experienced around 675 thousand data breaches in the first quarter of 2022 with the global average cost of a data breach being 4.24 million dollars, this is definitely something any business would want to avoid.

Where’s a virtual data room usually used?

Virtual data rooms are in demand in businesses where online data security matters. Let’s review a few examples of where virtual data room providers can be used.

Fundraising

When startups or small companies seek an investment, having a virtual data room with all the information stored in one secure online space makes the process of conducting the business deal faster and smoother. 

Virtual data rooms facilitate data sharing for stakeholders and enable you to take part in the due diligence process without any risk to your confidential information. 

Legal documents management

Law firms or private attorneys deal with lots of confidential documents and sensitive information, such as proprietary data. Granting their clients a secure share of all those files is a key, and this is possible by implementing virtual data room services.

M&A deals

Due diligence is an essential part of the M&A process. When a small company seeks opportunities of getting acquired by large corporations, lots of document management is expected. A virtual data room allows both parties to safely share sensitive documents without any harm to the intellectual property. 

Real estate

Virtual data room solutions allow real estate agents to have a secure online repository for sharing and storing such data as potential buyers’ sensitive information, financial transactions, property portfolio (photos, video, and house plans), etc. 

What’s more, virtual data rooms enable a few potential buyers to study the real estate information inside the deal room without knowing there’s any competition.

Life science

Virtual data rooms are extremely helpful in the life sciences industry since they grant the proper level of security for such confidential information as the patients’ specifics, research results, or data related to the intellectual property.

Why is a virtual data room a good decision for business?

Virtual data room providers are widely used in many industries, primarily because of the safety they offer. But what’s more? Let’s have a look at the main reasons you would want to implement virtual data room solutions.

Secure document sharing

Virtual data rooms offer companies the ability to safely store and share sensitive corporate information with third parties. Each VDR provider maintains its own security implementations, still, they all focus on a high level of security for data sharing.

Accelerated fundraising

A virtual data room contains all the documents and information about financial transactions a potential investor would need. Thus, the process of making a final decision upon funding is speeded up, which gives businesses a chance to gain new heights at the soonest.

Smooth due diligence processes

When all the physical documents and sensitive information about the company is in one place, the due diligence proceeds faster and is much more transparent. A virtual data room gives all the involved parties more freedom and reduces the need to plan extra meetings for gathering all the missing details. 

Ability to track the project management

Virtual data rooms allow for timely access to all the updates a company goes through and recent business transactions. This way, you’ll always be aware of what’s going on in your firm and where to move forward.

Clear business structure

Financial statements, board communications details, everyday files, proprietary data, private equity particulars, and more. Having all the information about your company in one secure virtual data room enables you to monitor all the changes happening in your business. What’s more, it lets you provide details about it to the third parties (when necessary) in a timely manner.

What makes up a good virtual data room?

VDR market offers a number of virtual data room solutions. So what should you expect a good data room provider to have? These are the key aspects of the best virtual data rooms:

  • User friendly interface. The easier it is to surf the data room software, the more interest such a product will have amongst potential users. Virtual data rooms with clear and lag-free interfaces that are easy to set up gain more trust and help companies to cooperate with third parties more efficiently.
  • Features for secure document sharing and storing. This includes various services that enable the safety of your data. Some of the common features are fence view, digital watermarks, remote shred, encrypted archives, multi factor authentication, etc. Many providers also offer redaction, which allows certain restrictions of access to all the personally identifiable and sensitive info.
  • Collaboration tools. Online data room providers with built-in modules for communication are a popular decision for many virtual data rooms. Such features are especially useful for companies that undergo the due diligence process since all the emerging issues can be solved in a breeze without leaving the virtual data room.
  • Access settings. An advanced virtual data room allows the administrator to control who can enter the space, become authorized users, or upload files and restrict access to certain files when needed.
  • Ability to monitor data room activity. A good data room provider enables administrators to track who views what and for how long. For example, if you notice prospective investors’ particular attention to some files, this could speak about a certain concern. Knowing that you can react proactively.
  • User-management. The data room industry is all about granting users easy access to piles of information. And the effortless organization is a key here. Administrators of virtual data rooms usually can benefit from such collaboration tools as bulk invitations, role-based access settings, group setups, custom email notifications, and more.
  • Outstanding support. The main difference between a physical data room and all the virtual deal rooms is that you can get more help online in case of any issue arises. Popular virtual data rooms provide round-the-clock assistance by several channels of communication: online chat, phone, or email
  • File organization. Not only secure document sharing is vital for traditional data rooms, the way all those files are stored and organized matters as well. A simple and transparent data room arrangement simplifies the user experience.
  • Reports. Reporting feature inside virtual data rooms is helpful in many fields — from investment banking to collaboration on the team. Activity reports enable administrators to analyze users’ performance, control the document access security, adjust the overall strategy, and more.

Main benefits of data rooms

As seen in the aforementioned examples, datarooms are making their way into almost every industry. What makes them so attractive? What are their main benefits?

  • Security. One of the core benefits of a virtual data room over a standard cloud-storage service is its security features. Through regulatory compliance,  this virtual space provides bank-grade security and file encryption. 
  • Accessibility. A virtual data room is built around two premises — security and accessibility. A dataroom is perfect for making deals in a safe environment, reducing the risk of a data breach. 
  • Cost-effectiveness. Compared to physical data rooms,  VDRs are much more affordable. Your company does not have to rent a space, employ security guards, or cover travel and lodging expenses for interested parties. 
  • Efficiency. A data room provides authorized personnel access to needed company files anytime, from anywhere — with only an internet connection. This helps to improve workflow and promote company processes. 

How to start a virtual data room?

These are a few general steps to take to set up any of the virtual data rooms:

  1. Choose a data room provider for your needs. Though the majority of popular virtual data rooms provide quite similar services, there are certain tools that make particular virtual data room solutions stand out. Pay attention to those functions, as well as pricing plans, and opt for the best fit.
  2. Decide what documents to add. Figuring out what files to include in data rooms solely depends on your initial goals. What’s your reason for using virtual data rooms? Do you have upcoming plans for investment banking or just want to improve the collaboration on the team?
  3. Upload files. After determining your needs, start uploading all the necessary documents. Pay attention to the organization of the uploaded files — use folders and directories, opt for a clear naming scheme, etc.
  4.  Add users and create groups. When all the files are uploaded, start adding users who will have access to the storage. Add them in groups if needed.
  5. Manage access permissions. Define the roles of each user and set permissions. Determine who can view, download, download original (unwatermarked files), and edit documents.
  6. Redact any data users should not see. Think of what information users should not see, and hide it.
  7. Test the View As feature. This tool enables you to see how exactly the particular document or folder looks for users and check whether all the access permissions work right.

What to include in a virtual data room?

The files to upload to the virtual data room differ depending on your needs. For instance, the package of documents prepared for investment bankers will greatly differ from files for improving the collaboration on the team. Still, let’s define a few common categories of documents to share in a virtual deal room.

1. Basic corporate documents

Here, you should add all the company-related files. For instance:

  • Business permits
  • List of subsidiaries and percentage of ownership
  • List of current directors and officers
  • List of jurisdictions where company can do business
  • Franchise details (If any)

2. Financials and taxes

Everything about finances in your company should be added. A few examples:

  • Loans notes
  • Accounts payable schedule
  • Letters from auditors
  • Monthly and quarterly financials
  • Capital leases
  • Information about cash flow
  • Pricing policy

3. Capital stock

Think of adding such documents as:

  • Shareholder list
  • Voting agreements
  • Registration and management rights agreements
  • Buy-sell agreements
  • Stock certificates

4. Securities

This category of documents includes everything security-related: from proxies to security law permits.

5. Marketing materials

What is used for your company’s marketing and PR needs? Some possible documents to upload are:

  • List of customers
  • Sales plan
  • Product road maps
  • Industry reports
  • Recent product campaigns

6. Intellectual property

These are a few examples of what to add to a virtual data room:

  • Patent applications
  • Summary of patents
  • Software license agreements
  • IP litigation summary
  • Trademarks

7. Manufacturers

This category includes all the materials about the list of current manufacturers and suppliers, as well as manufacturing and supplier agreements.

8. Legal documents

All the notes about litigation, insurance, and licenses should also be added.

9. Information about the team

Think of uploading data about your employees:

  • List of all employees including information on their salary, date of hire, position, etc.)
  • Bonus plans
  • Employment agreements
  • Benefit plan summary

Tips for implementation 

You might see a need for a virtual data room solution for your company. We have a few tips that might help you with implementing this online storage service into your business. 

Talk to the providers directly. Contact the provider to discuss your needs for secure data storage. A company representative can present you with your options and calculate a personalized quote.

Read reviews. See what other people are saying about the provider you are targeting. What are their use cases, and what are the pros and cons of the solution proposed by their virtual data room?

See if there is a free trial available. A free trial allows you to form your own opinion about the product. In addition, you can see what tools are at your disposal and how they’ll fit your company.

Keeping your company files safe is important for any business. Using virtual data rooms  to store your documents in a digital space offers bank-grade security and accessibility for authorized parties. Employing a virtual data room solution in your company might be much easier, thanks to our tips. Find out if your business can benefit from this software solution. 

Takeaways

Virtual deal rooms are a good decision for many businesses. It’s a modern solution both for organizing your company’s files and attracting private equity. And considering the fact that the VDR market has a lot of providers to offer, every user will be able to find something for their needs.