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WHAT IS A VIRTUAL DATA ROOM?

What is the definition of a Virtual Data Room?

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A virtual data room (VDR), sometimes called a virtual deal room, is a secure online repository of information used for the storing and sharing of documents with third parties during due diligence and other transactions. Modern virtual data rooms allow administrators to organize documents in a logical way and to stage the sharing of documents as a deal progresses. Today, virtual data rooms have essentially replaced physical data rooms, where hard copies of documents were stored in a lawyer’s office or other secure environment for review.

Why Do Organizations Use Virtual Data Rooms?

Businesses typically use a virtual data room whenever critical and sensitive information needs to be shared with external customers or partners in a secure and easily accessible environment. Virtual data rooms are typically used to facilitate the due diligence process during M&A transactions or for licensing or partnering deals, but they are also used across industries for a variety of applications, including:

  • Loan Disposition
  • Fundraising
  • IPOs
  • Real Estate Transactions
  • University Technology Transfer
  • Board Collaboration
  • Corporate Repository
  • Litigation
  • Audits
  • Research and Development
  • Supply Chain Management
  • BioPharma Partnering and Licensing
  • Business Development
  • Investor Communications
  • Bankruptcy and Corporate Restructuring
  • Private Equity and Venture Capital Transactions
  • Joint Ventures

The Advantages of a Virtual Data Room

  1. Streamlines Document Review
    A virtual data room can be set up in hours and is accessible 24/7 via the Internet to users to whom you provide permissions, thus eliminating the need for meetings, travel time and printing. With secure batch upload, download and print, getting your documentation in a virtual data room is a simple process, whether you are staging documents that will be shared in the future or sharing documents with third parties.
    Further, a VDR allows a user to simultaneously view multiple documents, click interdocument hyperlinks to move from one document to the next, and link questions to a document page, aiding a reviewer in answering the question. Additionally, VDR search functions enable a user to search all documents for a key phrase, making it easy to find content. For all parties involved, virtual data rooms speeds up the collaboration process and can even accelerate partnership or deal timelines.
  2. Gives you Confidence in Security & Document Control
    Compared to a physical data room, a VDR is accessible to more parties simultaneously; you can even restrict different organizations from knowing who has access to the documentation in a VDR. This is because at the document, folder or user level, you are able to customize document permissions. This enables you to set expiration dates for when a document is no longer available to a user, apply watermarking, or “virtually shred” a document to which you no longer want a user to have access. When the document is virtually shredded, the user is unable to open the document.
    Further, virtual data rooms have powerful reporting and analytics tools that enable you to see, at the page level, how long and who has viewed the documents in your VDR. For regulatory and compliance purposes, you also have a full audit trail of questions and answers, document changes and viewing history. All in all, a VDR gives you better deal or partnering intelligence.

Common Virtual Data Room Concerns

From a seller’s perspective, there are often concerns about the security and confidentiality of the sensitive information populated in a virtual data room. They are concerned that parties, who have not been given permission to view the documents, could access their confidential information. The fact is, a virtual data room is much more secure than a physical data room and other methods of sharing confidential information, such as email, CDs, USB drives and FTP sites.

A good VDR is secure because it leverages enterprise-grade security, protecting data from internal and external threat. No matter the device or the software platform, you can have the confidence that your documentation is safe.

MULTI-LEVEL ENCRYPTION

Sophisticated VDR providers employ multi-level encryption throughout the document lifecycle with AES 256-bit encryption, including encryption in transit (SSL) and persistent encryption with IRM (information rights management). Documents protected with IRM can only be opened with an active VDR connection, so the permission of a user to open a document can be revoked retroactively. In this way, documents can be remotely “shredded,” even after they’ve been downloaded.

DOCUMENT PERMISSIONING AND SECURITY POLICIES

A VDR’s permissioning feature makes it easy for administrators to grant specific users and groups access to particular documents. For instance, permission to read legal documents might only be granted to a firm’s corporate counsel, while viewing rights to employee records might only be granted to HR.

A VDR’s security policies, on the other hand, allow an administrator to define what a user is allowed to do with the documents they have access to, such as the right to print, save, copy/paste, take screenshots or access the original document, and whether a watermark should be applied. A VDR with full-featured policies provides the ability to control exactly what rights each user has when accessing content and to easily modify these rights as the project progresses.

DYNAMIC WATERMARKING

Applying a dynamic watermark to each page of a document can be a strong deterrent on documents that users are permitted to print because it provides a clear reminder to the reader that the content is confidential. Watermarks should be clearly visible, yet not interfere with the readability of the underlying text. Look for watermarking text that is customizable, so you can embed dynamic information such as a user’s email address, a user’s IP address and the current date and time.

SECURE PRINTING

In some cases, you may wish to grant the right to a user to print a document, while not allowing the user to be able to print to PDF. This is a subtle, but important, additional security feature — without it, you risk inadvertently granting users the ability to easily save a permanent, irrevocable digital copy of the document on their computer.

HOW TO CHOOSE A VIRTUAL DATA ROOM: A GUIDE

A virtual data room is a cloud-based repository of information employed for sharing sensitive documents during due diligence in a variety of applications including M&A transactions, fundraising, loan syndication, and licensing and partnering deals. Companies can control each user or group of users’ level of access to the information based on their need to see that information and can revoke access at any time as situations evolve. Modern virtual data rooms employ a variety of features designed to facilitate and streamline the due diligence process, as well as keep sensitive information secure.

WHEN CHOOSING A DATA ROOM, LOOK FOR THESE FEATURES:

DOCUMENT CONTROL

At the heart of any modern virtual data room is the ability to secure and control sensitive documents while sharing them with third parties. A good virtual data room utilizes enterprise-grade security, even on computers and devices that are outside the control of a firm’s IT department. This security technology should be applied uniformly, regardless of whether documents are viewed on Windows, Macs, iOS or Android devices. Look for a data room that employs multi-level encryption, information rights management (IRM) and advanced document permissioning and security policies.

DYNAMIC WATERMARKING

Based on the security policy you’ve defined, a VDR should have the ability to automatically apply dynamic watermarks to each page of protected documents. Watermarks should be clearly visible, yet not interfere with the readability of the underlying text. Look for watermarking text that is customizable, so you can embed dynamic information such as a user’s email address and IP address, as well as the current date and time, providing a clear reminder to the reader that the content is confidential.

SECURE PRINTING

In some cases, you may wish to grant the right to a user to print a document, yet not allow the user to be able to print to PDF. This is a subtle, but important, additional security feature — without it, you risk inadvertently granting users the ability to easily save a permanent, irrevocable digital copy of the document on their computer.

THE ABILITY TO MONITOR USER ACTIVITY

The ability to monitor user activity in the data room can be very useful in gathering deal intelligence. Look for a data room that employs page-level tracking of who’s seen what and for how long. This information not only provides insightful information about your users’ review process, but also generates detailed audit trails necessary for compliance.

A SECURE AND RELIABLE CLOUD INFRASTRUCTURE

When choosing a virtual data room, it is important to determine if their servers are located at world-class data centers and hosted by a high-end service provider. Ensure the provider is supplying comprehensive security and reliability through multiple levels of redundancy. Determine that servers are high availability with hot-swappable components and that the data center infrastructure is designed for high reliability, including redundant network connectivity, power systems, cooling systems, routers and cabling.

ACCELERATE DOCUMENT PREPARATION AND REVIEW

A virtual data room should accelerate the due diligence process rather than impede or frustrate it. Look for a virtual data room that employs features that are designed to expedite the deal process, such as infinite scrolling, drag-and-drop publishing, automated PDF conversion, no restriction on file sizes and the ability to batch download. Remember, a virtual data room can be an essential tool for facilitating deal transactions and other applications where it’s imperative to share confidential documents securely. However, choosing the right virtual data room with the advanced functionality you require can be the difference between an efficiently streamlined process and one that is aggravating and compromises deal success.

CONCLUSION

As physical data rooms quickly become dinosaurs in the deal-making world; it becomes increasingly important to familiarize yourself with the advanced functionality of virtual data rooms. Today, it’s what parties on both sides of a deal have come to expect. Remember, a virtual data room can be an essential tool for facilitating deal transactions and other applications where it’s imperative to share confidential documents securely. However, choosing the right virtual data room with the advanced functionality you require can be the difference between an efficiently streamlined process and one that is aggravating and compromises deal success.

To learn even more about how a virtual data room can keep your documents safe while facilitating and streamlining the due diligence process, download our free white paper, "The Seven Habits of Highly Effective Data Rooms."