How to set up a virtual data room: A 9-step algorithm

Virtual data rooms (VDRs) are secure online repositories for storing, sharing, and collaborating on  confidential documents during various business needs and special transactions such as M&A, IPOs, and fundraising.

To take full advantage of a VDR solution and to ensure proper confidentiality and accessibility of sensitive information, the correct virtual data room setup is required.

This article aims to give practical advice on preparing a VDR for usage, particularly for due diligence.

How to set up a virtual data room?

Here are the nine steps to follow during your data room setup.

1. Select a virtual data room provider

The best recommendations for choosing the right VDR provider include:

• Identify your business needs. Determine exactly what’s the data room meaning in your specific case, how much data storage is required, what types of files will be stored, and how many users will need access to the software.

• Specify what features you need. Consider the features you’ll need for comprehensive and secure document management, including watermarking documents, redaction, drag-and-drop, user permissions, audit trails, and customization. To be sure you choose the right provider with the right functionality, compare the best virtual data room software available on the market.

• Check the provider’s reputation and security levels. Read case studies and customer reviews on platforms like G2 and Capterra. Additionally, check if a provider has industry certifications, including ISO 27001, SOC 2, or HIPAA.

• Compare prices. Check what contract terms different providers offer and how much they charge. Make sure there are no hidden costs and that the pricing is transparent.

2. Configure the data room’s general settings

Setting up a data room usually starts with the configuration of basic items:

• Name the project. Generate the name for your deal. For increased security during M&A deals, it’s recommended to use a random name generator.

• Disclose the project administrators’ contacts. Make sure future VDR users can reach out to administrators in case of project-related questions.

• Create a non-disclosure agreement (NDA). Mitigate the risk of data breaches and intellectual property theft by adding an NDA to the data room and having all shareholders sign it.

3. Customize your data room’s branding

Many data room providers offer customization tools that help their clients personalize the look and feel of the data room and reinforce their brand identity. In particular, VDR users can: 

• Add the company’s logo. Upload your company’s logo to the data room’s header or footer section.

• Choose brand colors. Select the color that represents your brand and ensure it aligns with the logo.

• Customize login page background. Personalize the login page with your logo or a picture that reflects your brand’s identity.

4. Configure watermarks

What is a watermark on a document? This is an image or text (user name, data, or IP address) that appears on sensitive documents behind the main text.

Watermarking provided by data rooms are required for:

• Security. A watermark indicates that a document contains confidential information and can’t be shared without permission.

• Traceability. A watermark can be used to trace the source of leakage.

• Compliance. A watermark may be required by some regulatory bodies to ensure compliance with data protection standards.

For security purposes, data room providers recommend keeping watermarks on all the documents and avoiding the distribution of original unwatermarked files.

5. Set up document labels

Labeling is a convenient way to classify documents and create a folder structure that’s clean and easy to navigate. 

Types of document labels can vary, but the most common ones are:

• Department labels. Organize files based on what department they’re related to. For example, Legal, Finance, Marketing, or IT.

• Status labels. Categorize documents based on their status. For example, In Review, To Do, Approved, or Rejected.

• Access labels. Classify files based on who can view, download, or edit them. For example, Confidential, Restricted, or Public.

6. Add documents and files

Due to the numerous document management features present in modern virtual data rooms, uploading and organizing files is now an effortless process. Here’s what you can usually do:

• Drag and drop files. Select the files you want to upload and simply drag them to the VDR platform.

• Upload files in bulk. Upload multiple files at once with no limits on the size or number.

• Enable automatic document indexing. Choose whether your documents should be sequentially numbered or appear in numerical-alphabetical order.

• Label files. Organize the uploaded files based on category (status, access, department).

• Rename files. Make a document name more descriptive by simply renaming it from within the data room.

• Upload files in any format. Upload documents in any format and have them converted into secure PDF files.

7. Create groups and invite users

Most data room providers offer a user management page where you can:

• Create groups
• Name the group and assign a description if desired
• Add users one by one or invite hundreds of new members in bulk.

There are usually two types of users in a data room:

• Administrators. Administrators can withdraw and grant access to documents, set request permissions for group members, hide members from each other, create a file structure, view activity reports, and generally manage the entire data room.

• Users. Users may have different access rights. However, in general, regular users are allowed to view and search for documents, add comments, communicate with group members, and, if necessary, edit, print, or download files.

8. Set permissions 

By using a file permissions tab, administrators can set levels of user access by folder, document, or group. The most common permissions include:

• None. A user has no access to the specific data room’s data (the same user can have access to other data rooms’ documents).

• Fence view. A user can only view parts of a document by moving the cursor. The rest of the doc is masked by a fence. This can be particularly useful when dealing with sensitive information, as it helps to minimize the risk of unauthorized access.

• View. A user can view but can’t print or download the document. Additionally, there is a possibility to view Excel files in two modes — with and without formulas.

• Download an encrypted file. A user can download an encrypted version of a file. A code may be required to open it after downloading. It adds an extra layer of security and allows tracking of user activity with the document.

• Print. A user can print documents in addition to viewing and downloading the encrypted file.

• Download PDF. A user can download PDF files with watermarks, and administrators can track the downloading events.

• Download original. A user can download documents in the original format. 

• Upload. Users, even those without administrative rights, can upload files. This can be restricted to specific folders.

9. Confirm data room software settings

Confirming data room settings is an important step in ensuring that the solution is secure and functions properly. Here’s what to pay attention to:

• Review the administrator settings. The administrator should have access to the VDR settings and should review them thoroughly to ensure they are correct.

• Test user access. Test user access to the data room using a view as feature. Ensure that the user can only access the documents and folders that they have been granted permission to access.

• Review security settings. Review the security settings like two-factor authentication, data encryption, and watermarks.

• Check the audit trail tool. Confirm that a data room tracks and records all necessary information, such as who and when accessed the documents.

How to organize a virtual data room for M&A

A typical M&A deal involves sharing hundreds of confidential documents between the involved parties and can take months or, sometimes, years to finalize.

A virtual data room provides M&A participants with secure document storage and tools for collaboration and, thus,  it is the best solution for completing the deal with the needed efficiency and security. However, it’s important to organize a VDR properly for an M&A transaction to be able to take full advantage of it. Find the essential recommendations below.

1. Ensure security

To prevent the risks of disclosure of sensitive information, the first thing that data room administrators should do is to make sure all documents are protected to prevent them from falling into the wrong hands. More specifically, they should check if only authorized users have access permission and if encryption functions properly. Another important task is to constantly monitor user activity in the data room.

2. Provide clear instructions

Usually, data room providers offer training materials and live sessions on how to use the software effectively. However, it’s important for VDR administrators to be available to assist new members with support requests and answer data room or project management questions. 

The next step would be organizing a data room for due diligence — the process of conducting a review of a target company with the purpose of evaluating potential risks and benefits associated with an upcoming transaction. Let’s see how you can prepare a VDR for this process.

How to organize a virtual data room for due diligence

Due diligence typically involves examining financial records, contracts, legal documents, intellectual property, and other related documents of a target company. The process’s duration depends on several factors, including the complexity of the transaction, and it ranges from several weeks to months, in the case of complex deals.

Proper data room preparation for due diligence is essential for the deal’s success. Here’s what you can do to achieve the best results.

1. Follow a due diligence checklist

A due diligence checklist is a detailed list of documents a company needs to prepare and share with the reviewers. It’s usually structured by categories like legal, financial, marketing, HR, etc. You can make a list on your own based on your industry and company intricacies or use a template created by due diligence professionals.

2. Mind what documents you share

Be cautious when sharing highly confidential files with the acquiring company. For example, third-party financial experts may not need to access your legal documents. Virtual data rooms offer enough user permissions features to allow full control over what you share and whom you share it with.

3. Strive for clarity

To make the due diligence as easy as possible, follow three simple steps. First, create a logical folder structure so that users can navigate the data room easily and intuitively — use an automatic index numbering feature to help. Second, name files clearly and descriptively. Third, upload financial documents, reports, analytics, and other documents, when needed, as Excel files to increase readability and security, as data rooms can Excel formulas.

4. Keep documents updated

Avoid cluttering the virtual data room with irrelevant documents, as this can lead to confusion and process delays, potentially impacting the valuation of your company or even terminating the deal. Demonstrate transparency and commitment to the transaction by providing the buyer with updated and relevant information.

Final takeaways

Proper organization of a virtual data room is crucial for successfully maintaining confidential data security and enhancing the efficiency of different projects and transactions. Failure to provide secure and straightforward access to confidential information may lead to a damaged reputation, delays, or even deal termination. 

To avoid these negative consequences, businesses use virtual data rooms. In 2023, these platforms have become the best solution available on the market for secure data sharing and collaboration. 

We hope that by implementing the most effective data room solution for your business, you can conduct transactions with ease and achieve successful outcomes.

FAQ