Home Blog Virtual Data Room (What It Is And Why It’s Important: Overview)

Virtual Data Room (What It Is And Why It’s Important: Overview)

What is a Virtual Data Room?

Why do you need a virtual data room?

What are the essential elements you should know!

Keep reading as I have gathered exactly the information that you need!

Let’s understand virtual data rooms and see why they are so important!

Are you ready?

Let’s get started!

What Is A Virtual Data Room 

A virtual data room, also referred to as a virtual deal room, is an online repository where you will typically store electronic documents and securely share them with others.

In business, most of the time a virtual data space is used to share documents and electronic files in the context of due diligence performed by investors, financial institutions, audits, and for business purchase or sale.

As more and more businesses offer their products and services online and conduct more and more business online, the use of virtual data rooms has also increased over the years to safely store and share corporate information.

For example, in the context of an M&A, the selling company will establish a virtual deal space where it will upload a series of documents and electronic files to share with specific individuals or groups of individuals at the purchasing company.

The objective of using a “virtual data room” is for the party sharing information and documents to do so securely and with a greater level of control.

In fact, the company setting up the virtual deal room is able to configure the space in such a way that specific individuals or people may access the data, the documents could only be viewed, documents could not be printed, accesses to expire after a certain period of time or once the data is viewed, etc.

Since most companies have a lot of confidential information and private data they would not want to be leaked into the public domain or fall into the hands of the competitor, the safest manner in sharing sensitive commercial data is to set up a virtual data room.

When To Use A Virtual Data Room

There are many reasons and use cases why virtual data rooms may be used.

Let’s look at the most common reasons why secure virtual data rooms may be used by companies today.

Mergers And Acquisitions

One of the most common reasons why a secure virtual data room is set up is in the context of mergers and acquisitions.

In fact, for a company to buy or sell another company or for companies to merge, they may be required to share a lot of internal and private information with one another as part of the due diligence process.

Considering most of the data shared between the transacting parties are sensitive and confidential, the best course of action is to establish a virtual dataroom where the target will share the required information with the acquirer.

The use of a virtual data room will provide the target company sufficient comfort and security to be able to share its sensitive information.

Company Audits

In the context of an important company audit, virtual data rooms can help streamline the process.

Whether the audit is an internal audit by the company’s auditors or whether it’s a regulatory audit, the best practice is to set up a data room in a virtual space where all interested parties can get access to the documents they need from a centralized point of access.

When dealing with an audit, it’s crucial that the company shares the correct information with the right person to avoid complicating the audit process.

Using “virtual data rooms” will allow companies undergoing audits to share the right document with the right person and only for the time period that it is needed.

Business Partners

Another common reason why a “virtual” data room is used in the business world is for business partners to share important pieces of data and information with one another.

For example, if a company enters into a joint venture with another to develop a new product or work on a specific project, they may want to use a data room to virtually share key information they will need to work with one another.

For example, imagine that there’s a large construction project where there may be hundreds of subcontractors working on it, thousands of individuals, and the project is expected to last for a few years.

In that case, a virtual data room will be quite helpful in allowing the general contractor to share key information with all subcontractors along with specific information with specific subcontractors or their representatives.

This way, if there’s a commercial document that is amended or modified, everyone with access to the online space can immediately get access to it.

Initial Public Offering

Another reason why a company may leverage a virtual deal room is in the context of an initial public offering.

An initial public offering is a process where a private company undergoes a process to list its shares in the stock exchange and “get listed” so it can sell its shares to the public.

An IPO process is quite extensive, involves the sharing of lots of data, takes time, and is a big deal for the company going through that process.

To ensure full transparency and proper communication of data, the company going through the IPO process will set up a data room online to exchange documents with regulators, lawyers, accountants, and others involved in the transaction.

Why Use A Virtual Data Room

In business, there are many benefits to using a virtual data room.

The main objectives of virtual data rooms are to:

  • Safely and easily store digital files and information
  • Organize your electronic files
  • Share your sensitive and confidential digital files with others 

It’s quite common to see virtual deal room used:

  • For mergers and acquisitions (M&A)
  • For various due diligence needs 
  • For fundraising needs
  • For an initial public offering (IPO)
  • For strategic partnerships 
  • For internal, external, or regulatory audits
  • To manage intellectual property 
  • For board communications
  • For secured document sharing 
  • For corporate restructuring, insolvency, and bankruptcy matters 

While in the past physical data rooms were used to share sensitive and protected information with others, in the modern days, companies will use a virtual data room provider or a virtual data room software to manage their document sharing needs.

The advantage for a company to use a virtual data room is that:

  • It has a central repository of its data
  • It can give access to specific individuals or groups of individuals
  • The documents can be “view only”
  • The ability to copy, print, and share the document can be restricted
  • Anyone accessing the data room can do so at any time convenient for them
  • The access to users can be easily granted and removed 

These are just some reasons why virtual rooms are used to store and share data but there may be more use cases.

Who Uses A Virtual Data Room

Anyone looking to share digital files, digital documents, or electronic data in a safe and secure manner may potentially need to use a virtual data room.

There are certain industries that use virtual rooms more than others although every company may potentially need to use one in its lifecycle.

For example, the life science industry and the technology industry appear to be more heavily invested in the use of deal rooms online to store, organize, and exchange proprietary data.

In the technology space, companies tend to innovate at rapid speeds and thus generate a significant volume of proprietary and sensitive data.

Maintaining a secure online repository of proprietary data can help technology companies deal with venture capitalists, angel investors, M&A transactions, audits, compliance, IPO, and other important events in the life of a technology company.

Life science companies use deal rooms online to handle important transactions and events on their side as well such as keeping and sharing clinical trial data, intellectual property rights, HIPAA compliance data, M&A information, fundraising information, and more.

Here are other types of companies that may rely on electronic data rooms:

In the end, if you have confidential data that you need to share and you want to be protected, you may want to consider getting a virtual data room either through a virtual data room vendor or by getting a virtual data room application.

Virtual Data Room Features

In the past decade, many virtual data room vendors and providers have entered the market offering more features and options to their clients.

Depending on your specific needs, you will need to evaluate the features and functionalities offered by a virtual data room vendor to ensure there is a good fit.

Here are some of the main features offered by virtual data room applications:

  • Drag and drop features
  • Bulk upload features
  • Ability to redact the document
  • Easy user invitation process 
  • Easy file management system 
  • Dashboard for analytics 
  • Detailed reporting 
  • Multiple viewing options 
  • M&A workflow 
  • Mobile-friendly application
  • Auto-indexing of documents 
  • Single sign on 
  • Unlimited virtual data rooms 
  • Integrated Q&A features
  • Ability to remotely disable documents
  • Document security controls (save, print, edit, copy configurations)
  • Artificial intelligence capabilities 
  • Video and chat integrations 
  • 24/7 support services 

If you contact different vendors, they will provide you with the list of features and capabilities that they offer so you can make an informed decision.

It’s important to reach out to a few vendors to understand their strengths and weaknesses along with their price list so do not end up with surprise fees to pay.

Alternative To Virtual Data Rooms

If a company does not wish to use a virtual data room to share and exchange information with another, there are a couple of alternatives that may be considered.

The first alternative is for the company to use the data repository system it currently uses to share data with others.

Quite often, a company’s own data repository is not designed specifically for the purpose of secure hosting and exchange of data the same way that a virtual data room is designed for.

As a result, by sharing the data, you must recognize that the files being shared may be copied and retransmitted without your authorization.

If you are sharing sensitive company information or sharing information outside your organization, it’s important that you evaluate the pros and cons of potentially losing control over your data.

Another alternative to a virtual data room is the good old physical data room.

A physical data room is a secure physical establishment where individuals who are specifically authorized may access the documents kept in the facility for a certain period of time.

In many cases, governments and companies who have access to highly sensitive information that they need to be protected and safeguarded and where the risk of a cyber-attack would be catastrophic will use a physical space to store their documents.

Virtual Data Rooms Takeaway

So there you have it folks!

What is virtual data room?

In essence, virtual data rooms are online repositories where documents can be safely and securely hosted and shared with others.

Virtual data rooms for mergers and acquisitions along with virtual data rooms for due diligence are some of the most common reasons why companies may want to use an online deal room to share documents with one another.

There may be many more reasons why a company may want to use an online data room to securely exchange data, such as:

  • To share information with a financial institution or investor to raise funds
  • To share data with lawyers, accountants, and regulators in the context of an initial public offering 
  • To share sensitive corporate information with business partners
  • To perform internal audits, external audits, or regulator audits
  • To protect IP
  • To provide information to board members 
  • To share sensitive information with service providers, investors, external partiers, or others 

There are many benefits in using “virtual data rooms” particularly when it’s important to share sensitive information, minimize human error in sharing the wrong document, ensure that the electronic documents are not reproduced or copied, and have a good understanding of who accessed your files and when.

I hope this article gave you the essentials you need to make a more informed decision on getting a virtual data room.

Good luck!

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Now, let’s look at a summary of our findings.

Virtual Deal Rooms Overview

  • A virtual data room is an online “space” where a company can store, organize, and share proprietary, sensitive, and confidential data with others 
  • Virtual data rooms are largely used in the context of M&A, due diligence, fundraising, and between strategic business partners
  • Most companies may eventually need an online deal room at various stages in their lifecycle
  • Certain industries rely more heavily on the use of online deal rooms such as technology companies, life science companies, investment banking firms, venture capitalists, private equity firms, law firms, and accountants 
  • There are many vendors and software solutions out there, it’s important to define your specific needs and find a vendor that offers you features and capabilities suited for your use case 
Acquirer 
Board of director meeting 
Buy-side M&A
Confidentiality clause 
Data breach 
Data center 
Data room for due diligence
Data subject 
Digital rights management 
Initial public offering
In-house counsel 
Internal audit 
Non disclosure agreement 
Physical data room 
Proxy statement
Sell-side M&A
Sell vs sale 
System audit basics 
Target company 
Virtual data room due diligence 
Virtual data room M&A
Virtual data room provider 
Virtual data room software 
What is a cyber attack
What is a due diligence 
Author
Acquisition agreement 
Acquisition strategy 
Bear hug 
Black knight 
Board of directors meeting
Due diligence 
Fiduciary duty 
Friendly takeover 
Gray knight 
Hostile takeover 
Leveraged buyout
Litigation funding 
Loan syndication 
Market value 
Poison pill 
Price per share 
Purchase of assets 
Purchase of shares
Reverse takeover 
Reverse merger
Reverse triangular merger
Stock-for-stock merger
Swap ratio
Takeover bid 
Toehold purchase 
What is a SPAC
White knight
Author
Editorial Staff
Hello Nation! I'm a lawyer by trade and an entrepreneur by spirit. I specialize in law, business, marketing, and technology (and love it!). I'm an expert SEO and content marketer where I deeply enjoy writing content in highly competitive fields. On this blog, I share my experiences, knowledge, and provide you with golden nuggets of useful information. Enjoy!

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