Virtual Data Rooms: Buyer’s Guide

Virtual Data Rooms Buyer's Guide

You want to better understand virtual data rooms?

Are you looking to find all the relevant information regarding virtual data rooms to help you make a better purchase decision?

There’s so much information out there about data rooms! What do you make out of it?

Don’t despair! 

This is the perfect article for you!!

In this article, we will thoroughly analyze virtual data rooms. We will provide you information about what is a virtual data room, the common features you should expect of virtual data rooms, industry-specific online data rooms and look over important features crucial for a solid virtual data room software vendor to offer. 

This article is divided as follows:

  1. What is a virtual data room software?
  2. Common features offered by virtual data room software vendors
  3. Who needs a virtual data room software?
  4. Common workflows supported by virtual data rooms
  5. How to choose select the right virtual data room software provider
  6. Virtual data rooms and our takeaways

Let’s begin!

Be sure to check out our article on what is a data room and using a data room for a M&A transaction!

1- What is a virtual data room software?

Virtual Data Rooms Buyer's Guide

Virtual data room is a secure online document storage and sharing platform

A virtual data room is an efficient way to share and exchange sensitive documents with others in a safe and secure online environment.

Essentially, a virtual data room is a secure online space where company documents and records are digitally stored, hosted and shared with interested parties.

Those who have a need-to-know access to the company information will be given specific user permissions to access the virtual data room through an Internet connection.

Virtual data rooms are typically used in financial or legal transactions

A virtual data room is typically intended to be used in the context of a financial or legal transaction.

In most cases, we see virtual data rooms being used in the context of a purchase or a sale of a business.

Data rooms are used to share financial statements, company contracts, corporate material, intellectual property related material, material agreements, tax related information or any other information required for a particular commercial transaction.

A virtual data room’s primary function is to store and manage valuable data

A virtual data room’s core purpose is to help you store and manage documents and corporate data in the context of a transaction or to close a deal.

One party to a transaction wants to inspect company documents, contracts, title deeds and any other corporate record to validate a transaction before signing and the other party wants to share the information confidentially and in a controlled environment.

Virtual data rooms are designed to facilitate this exchange of information in an easy and secure way between the party who needs to know and the party who needs to share.

A lot of data produced in the world is transactional in nature

With the advancement of technology, digitalization of data in the world and the millions and billions of data generated by companies worldwide, a significant portion of the data produced every day is transactional in nature.

Due diligence processes and transactions in general require the review, analysis, access and ability to share a lot of data seamlessly and in a secure way.

This is where virtual data rooms are powerful as they are designed specifically for that.

Virtual data room software is typically a SaaS type of offering

Virtual data rooms are offered primarily as a software-as-a-service or SaaS offering by vendors.

This is advantageous as you will not have to purchase any particular equipment or hardware to start using a virtual data room.

Since the vendor offers you access to their virtual data platform, you will ultimately be storing your data and information on their servers.

As a result, when you are selecting the right vendor to work with, you will need to ensure that they offer you the best security and data protection warranties to help protect your data.

To learn more about data rooms, check out our article on what is a data room.

2- Common features offered by virtual data room software vendors

Virtual Data Rooms Buyer's Guide

A virtual data room software vendor must provide you with a software solution designed to help you in your deal-making process.

You should get a software solution that is both secure and easy to use.

To help you assess an online data room service provider’s offerings, we have identified some common features and functionalities you should expect.

Virtual data room service provider must have secure data management features 

There is no doubt that your virtual data room must be secure.

According to SecurityIntelligence.com, the average cost of data breach per company is estimated to be 3.92 million in 2019.

According to the same report, the country where companies have lost the most is in the United States, an average of $8.19 million per company studied, representing more than twice the global average.

This means that your software vendor has implemented robust data management processes to ensure the maximum security and protection of your information.

Secure data management features include:

  1. Permission-based user roles
  2. Activity tracking
  3. Audit logs
  4. Data encryption 
  5. Multi-step user authentication 
  6. Disabling of print screen function
  7. Disabling of copy functions
  8. Disabling of print function
  9. Disabling of download function 
  10. Dynamic watermarking 
  11. Access by time
  12. Access by IP address 
  13. Secure web browsing

These are some features that you should be getting from your virtual data room software vendor so you can get value for your money.

Data room providers have security certifications

Data room providers must have the most secure data room environment possible.

If your data room provider is unable to demonstrate to you that their virtual data room environment meets strict and best security standards possible, then you should not work with that data room provider.

Some security standards are listed below:

  • SOC 1
  • SSAE 16
  • ISAE 3402
  • SOC 2 Type II
  • FISMA
  • DIACAP
  • FedRAMP
  • HIPAA
  • ITAR 
  • DOD CSM

Make sure you speak with your data room provider about this.

Data room providers should also have:

  • PCI DSS Level 1
  • ISO 9001
  • ISO 27001
  • FIPS 140-2
  • MTCS Level 3

Major organizations will vet their virtual data room providers in advance and ensure that the providers meet the above security and industry standards.

Virtual data room software must also provide solid document management features

A solid virtual data room must provide you with robust document management system features.

At the end of the day, you are going to share and exchange documents so make sure that the software solution you choose will be easy to use and user-friendly.

Typical document management features offered by virtual data rooms are:

  1. Version control to maintain cord of changes to a document
  2. Control in the chain of custody with a check-in and check-out feature
  3. Alerts and notifications to alert someone to take an action or notify of an event happening
  4. Collaboration features to allow users to work collaboratively 
  5. Integration with your content management systems

Ideally, you should get a demo and have a period where you can test the system to see how you feel about the features and functionalities offered.

3- Who needs a virtual data room software?

Virtual Data Rooms Buyer's Guide

In most cases, individuals or businesses of any size may need to use a virtual data room if they are involved in a transaction requiring that a lot of documents be shared with many people.

Here are some examples of when virtual data rooms may be handy:

  1. To facilitate the review of a complex real estate transaction
  2. To conduct a due diligence as part of a mergers and acquisition transaction
  3. To structure a complex financing transaction with bankers or lenders
  4. Start-ups sharing information with venture capitalists
  5. Companies entering into a partnership, alliance or joint venture agreement
  6. Bankruptcy trustees using virtual data rooms to understand and help restructure a company
  7. Complex procurement deals
  8. Initial public offerings and IPO’s
  9. Corporate financing for start-ups, small businesses, large enterprises
  10. Intellectual property management to store all IP-related information 

As you can see, the possibilities are vast.

Virtual data rooms are quite effective in allowing you to share documents with others while keeping full control on the information being shared.

4- Common workflows supported by virtual data rooms

Virtual Data Rooms Buyer's Guide

In the virtual data rooms market, you will generally see two types of vendors: those offering a more generic and general purpose VDR and those that are designed for a specific industry.

To differentiate themselves, some VDR vendors will tailor their virtual data rooms to specific industries by developing commonly used workflows relevant to those industries. 

You will generally see VDR’s provide common workflows for six general areas.

General purpose VDR

A general purpose VDR is a virtual data room designed to satisfy a large segment of the market by providing features and functionalities that are standard in a wide range of transactions or deals.

They offer the typical secure storage of your data and satisfactory document sharing capabilities and workflows.

VDR’s for financial transactions

VDR’s for financial transactions such as:

  1. financing deals
  2. raising of capital
  3. investment transactions
  4. Mergers and acquisitions 
  5. Initial public offering (IPO)
  6. Corporate financing

The most typical use case is for mergers and acquisitions. 

Considering there are a number of parties requiring access to your corporate documents over time when dealing with a M&A transaction, these VDR vendors have their software solution designed to better facilitate the access and monitoring.

VDR’s for scientific purposes

The scientific industry is an important potential user of virtual data rooms. 

As you can appreciate there may be many stakeholders involved in the scientific industry working and collaborating with one another.

You will have regulatory agencies looking into newly developed products, the actual companies heavily invested in scientific research and development who employ many scientists and research professionals engaged on different projects, trial partners, the R&D branch of universities and their research facilities may all need to exchange information relating to a research project or a scientific activity.

Some software vendors will design their VDR to cater the scientific industry as a result.

VDR’s for legal purposes

Lawyers are a big fan of virtual data rooms!

Whether it’s in the context of a cross-border transaction, a litigation, M&A or any other legal transaction, lawyers will typically need to exchange and review a lot of data.

You will have online virtual data room vendors who will design their application to cater to lawyers’ needs handling large-scale litigation cases for instance.

Virtual data rooms are interesting for lawyers allowing them to control a lot of data while ensuring that the information reaches the right person and remains confidential.

VDR’s for commercial transactions

Another area where some vendors will develop features and functionalities suited for a particular purpose is with respect to commercial transactions and procurement processes.

In complex procurement processes, many internal stakeholders and potentially external specialists or advisors will need to share data.

A VDR with out-of-the-box features designed for commercial transactions and procurement processes can therefore facilitate this type of activity.

5- How to choose select the right virtual data room software provider

Virtual Data Rooms Buyer's Guide

Selecting the right virtual data room service provider is an important decision for the overall success of your business transaction.

As per the research performed by Intralinks, 90% of the VDR users trust that quality virtual data room software solutions can play an important role in the success of M&A deals

Intralinks also performed the survey regarding cross-border M&A and found that 81% of the respondents said that cross-border transactions required moderately to considerably more time than domestic transactions.

Selecting the right virtual data room software service provider will help you accelerate your due diligence process and expedite the conclusion of your deal.

Look at the virtual data room’s security and safety features

To select the right virtual data room software and vendor, you’ll need to assess their data room security and safety features.

Is your vendor using the state-of-the-art technologies, employing security best practices and are they certified by independent third party auditors for security robustness.

Here are some questions to ask your data room software vendor:

  1. Is my data encrypted?
  2. Are you using the best anti-virus programs to prevent your servers getting infected? 
  3. Do you use a two-factor authentication or a multi-factor authentication?
  4. Will users have a unique username and password?
  5. Do you have features to prevent downloading, file copying, printing or watermarking?

You want to make sure that the sensitive and confidential information you upload to your online data room will be secure and protected.

Where is your data stored?

Make sure you ask your SaaS virtual data room vendor where your data will be physically stored.

In other words, on how many servers will they store your data and where are those servers located?

You want to ensure that your data is stored in regions and jurisdictions offering you legal and political stability and safety. 

In most cases, you should have your data stored in servers located in your own region.

6- Virtual data rooms and our takeaways

Virtual Data Rooms Buyer's Guide

Today, virtual data rooms are essential in facilitating transactions in general and businesses entering into deals with one another.

Virtual data rooms are designed to provide you a secure platform where you can store and share sensitive company data. 

They are also designed to provide you with document management capabilities so you can easily share material in the context of due diligence or a transaction.

To learn more about data rooms, check out our article on what is a data room.

We look at physical data rooms and virtual data rooms and analyze the benefits of an online data room.

When selecting a virtual data room, you should make sure that your VDR vendor provides you with the security features and warranties to protect and safeguard your data but also provide you with an easy-to-use and user-friendly platform so you can seamlessly close your deals.

In this article, we have looked at virtual data rooms, their common features, the typical use cases and who may need a virtual data room.

We hope you enjoyed this article.

Have you used a virtual data room for a particular transaction or a deal? We would love to hear from you. Drop us a comment!