What is a Virtual Data Room?

virtual data room

A virtual data room (VDR) is a secure online repository of confidential information and documents often used as a central reference for a financial transaction. VDRs have been replacing traditional physical filing systems that had been common in the past as companies transition to paperless processes. The other advantage of a VDR is that the documents stored in it can be accessed through secure network and internet connections from other locations without making copies.

The main difference between a Virtual Data Room and other data storage options is security. They are used when confidentiality of sensitive corporate information must be maintained so that only those authorized can access them. It’s also important to ensure that the documents cannot be copied without authorization.

What is Stored in a Virtual Data Room?

The reason for the high security is that VDRs are needed to store legal, financial, and tax documents whose release to the public would be embarrassing or damaging for their owners. Other types of information that are placed in VDRs are intellectual property such as trade secrets, copyrighted works, and patents. Keeping such documents in a single, electronic location helps control their dissemination during, for example, business deal negotiations.

An example is a merger and acquisition deal. A VDR is often used during M&A negotiations to hold all the documents required for due diligence. For such business deals to take place, the companies involved must share highly sensitive internal documents and make sure only the authorized people can see them. Initial public offerings require a storage location for similar types of sensitive financial and legal records that document a business’s financial health, assets, and organization that are required by regulations on the local, state, and federal levels.

Beyond these types of time-sensitive transactions like business deals and legal proceedings, VDRs are used by many companies to store their sensitive information in a central location as an ongoing electronic archive. Different industries need VDRs to store different types of documents. A technology company might use a VDR to store venture capital-related information, audits, human resources files, and intellectual property. Life science and health industry organizations would have fundraising documents, clinical trials, patient records, and medical histories that need to remain confidential. Legal firms have client documents, litigation records, and client bankruptcy documents to store securely.

What Companies Provide Virtual Data Room Services?

Traditional VDR providers include companies like Firmex, Merrill Datasite, RR Donnelley, and Intralinks. These companies have been providing VDR services for many years, having developed to fill the need created by merger & acquisition regulations. Because they originated specifically with M&As in mind, their offerings tend to focus on that process. They provide ample storage space but tend to be expensive, being marketed to corporate and investment clients. Pricing tends to be quoted by the page scanned and uploaded, fees for extra user accounts, and the like. If a client needs to handle the documents for a major regulatory transaction like a merger and acquisition or an initial public offering, these providers may be the best place to go because of their experience in such matters. Others may want to look elsewhere.

VDRs, however, have been swept up in the technological trends of recent years. There are many modern VDR providers that include Firmex, V-Rooms, and Ansarada. Modern VDRs have brought modern software technologies like cloud services and user experience principles to the VDR market. These services can be much less expensive than traditional providers, but their ease of use and security can seem higher quality. They are more aware of cybersecurity threats to their client’s documents and work to mitigate them, and many of the supporting infrastructure they use like cloud services have advanced anti-hacking measures in place already.

Why Use VDRs When There are Other File Sharing Services?

Of course, if security is not of paramount importance for regulatory or other legal reasons, there are many excellent file sharing services that can accommodate large archives of information. Google’s Backup and Sync, Microsoft’s OneDrive, and Dropbox are obvious choices. However, these services cannot guarantee confidentiality and security the way VDR providers do. Storing very large amounts of data with these services can become more expensive as they are not intended to serve as large archives.