Why Do I Need a Virtual Data Room and How Do I Pick the Right One?

When you need to share data with people outside of your company or organization, a Virtual Data Room (VDR) can provide you with a secure, online environment. A VDR is a series of extranet to which outside users are given access. Customers or partners log in with a username and password that determines their identity and which portions of the extranet they can access.

Frequently used by attorneys, accountants, M&A principals and other professionals, VDR’s create a space for all relevant parties to review sensitive documents while decreasing the need for physical in-person meetings (and the costs associated), as well as hard copies of documents.

When you start exploring VDRs, you may think, why would I use a VDR when I could use a cloud-based storage system like Dropbox for free? While Dropbox may be great for sharing files that are too large to email, its security levels do not ensure complete privacy for documents uploaded.

If you’re navigating an important merger or acquisition, for instance, and need to share highly-sensitive financial documents, it could be catastrophic if those documents were viewed by the wrong person. For this reason, some major companies like IBM have restricted employees from using Dropbox, iCloud and other online apps and services due to security shortfalls.

If you find yourself in the position of having to share confidential information with people outside of your organization, it may be worth investing in a VDR. Your investment will provide your external clients/partners with peace-of-mind that their information is secure.

What are the Most Common Uses of Virtual Data Rooms?

In the financial world, VDRs (sometimes called “virtual deal rooms”) have become the norm. For instance, during the due diligence period of a merger or acquisition, a company may be asked to turn over volumes of sensitive financial data, even when they are just considering an offer. Using a VDR can allow both parties to engage in negotiations, safely viewing confidential information, but if the deal doesn’t close, access to the room can quickly be terminated.

If a company is considering going public, they will begin the very complicated process of launching an IPO. This laborious process requires precise document retention and management — all of a highly-sensitive nature, but at the same time requires a new level of transparency with shareholders. A VDR can keep all of your confidential documents safe, while providing access to the people who need it.

VDRs can be especially helpful in navigating board communications. Often times, board members would like to be closely involved with the day-to-day operations of an organization, but they may not live nearby or be able to make frequent visits to the company headquarters. Granting board members access to a VDR allows them to review documents quickly and safely, keeping them in the loop no matter where they may be physically located.

And while VDRs can be handy for any kind of secure data-sharing, they are becoming increasingly common among Human Resource departments. VDR’s assist with maintaining confidential employee records that include personal medical information and salary details that have to be shared with external vendors like healthcare and financial institutions.

Understanding the Different Types of Virtual Data Rooms  

Do a simple search for “Virtual Data Room” and you’ll get nearly 9 million results–a little overwhelming. It may be helpful to understand the two most common types of VDRs.

Three of the better-known VDRs are offered by Merrill Datasite, RR Donnelley and Intralinks. All three companies have a wealth of experience in mergers and acquisitions and their VDRs offer plenty of features without compromising security. All three allow for large data uploads and storage, but are typically pretty pricey. Because these VDRs were designed with mergers and acquisitions in mind, they are well equipped to handle large documents, but their pricing model reflects that with per-page upload fees, and fees for extra users.

More recent  VDRs that you may come across include SecureDocs, V-Rooms and Ansarada. These systems are typically very user-friendly and relatively inexpensive. While all VDRs are distinct, modern VDRs have a lot of security features including advanced encryption (both in transit and at rest)–256-bit AES SSL encryption is the gold standard for digital financial transactions. They also offer multi-level authentication procedures and discrete data room access.

So for instance, if someone is viewing a document through a web browser, this security feature will block sensitive data from showing up on the screen, preventing unauthorized users from taking a screenshot of the document. Modern VDRs also have a revocation process, sometimes referred to as “document expiry,” which enables the owner of the document to revoke sharing rights for the document at any time, even if another user has already downloaded it.

Your VDR may come with document-specific security such as dynamic watermarks, too. These watermarks are embedded into every document uploaded into the VDR and may contain the date of the upload, name of the project, and even the name and IP address of the person who uploaded the document.

What are the Key Factors to Consider When Selecting a Virtual Data Room?

There are many factors to consider when investing in a VDR. Obviously, security should be your number one priority. That’s why you are using a VDR and depending on which certifications your product offers, you can tout that information to your external clients and partners to let them know their data is safe with you.

Another consideration is cost. Most data room vendors charge based on the amount of storage used and the length of time that the data room is up. Some law firms with sophisticated M&A practices also provide their own proprietary data rooms. Other vendors charge a subscription for constant access. If you only need a VDR for a one-time deal, it might be best to go with a system that will charge you by usage. However, if you anticipate using it for multiple projects throughout the year, consider going with a flat fee, subscription-style service.

Two additional factors that go hand-in-hand are ease of use and functionality. You want your system to be user-friendly so that everyone who needs to access it — wherever they fall on the spectrum of tech-aptitude–is comfortable using the system. This will save you hours of training time and frustration on the part of your external clients. “Ease of use” also includes the ability to quickly set up the room and upload files in bulk.

As mentioned before, especially for mergers and acquisitions or the launch of an IPO, there is a tremendous amount of documents that need to be managed. Having a system that allows you to bulk upload zip files or drag and drop files will save you hours of time, keeping your deal moving quickly.

It is also important to keep in mind the variety of platforms that those viewing that VDR may be using — tablets, mobile devices, and various operating systems (Mac or PC). Ensure that your VDR is accessible via the technology platforms that your clients are most comfortable using.

If you are working with international clients/partners, you may want to think about choosing a VDR that offers 24-hour access, so that you are accommodating traditional work hours, no matter where your client is located in the world. Some VDRs also offer various languages (for the platform and the helpdesk support), which can prevent translation delays from setting your deal off-track.

Navigating a Growing Virtual Data Room Market

As the number of industries turning to VDMs grow–expanding to biotech, media, real estate, and many more, new VDR providers are entering the market. When you’re ready to start your search, be sure to make a list of what the most important features are for your company, essentially your must-haves and deal-breakers.

Make sure that whichever product you are interested in offers a free trial so you can get a sense of how user-friendly the VDR will be for you and your clients. Also, look for a provider who already has experience in the projects you are most likely to use it for, i.e. launching an IPO.

And finally, if you want to make sure your data is truly secure, make sure to select a provider who hosts and manages data in-house as opposed to outsourcing that responsibility to a third-party, which increases your risk for data breaches.