Data rooms

What is a data room?

A data room is a secure space for storing and sharing sensitive company documents and confidential information. Also known as a deal room, data rooms are used by private equity and venture capital firms, investment banking, and law firms to exchange confidential documents during the due diligence process in mergers and acquisitions (M&A), initial public offerings (IPOs), fundraising, audits, and other transactions.

Data rooms allow authorized parties to review, collaborate, and approve confidential documents without compromising their integrity or security. In the past, businesses used physical data rooms with filing cabinets to keep their information safe, but today most are now virtual data rooms (VDRs) and data centers. 

During due diligence, a data room serves as a centralized, secure location to manage and control access to sensitive information. Data room software often includes security features like: 

• Access and permissions: Ensures only authorized personnel have access to documents, including role-based permissions, password protection, and two-factor authentication. 

• Encryption: Data is encrypted to protect against breaches or unauthorized access.

• Watermarking: Added to documents to decrease the risk of theft or document alteration.

• Redaction: Removes personally identifiable information and confidential information beyond the intended scope for which the document was disclosed.

• Monitoring: Logs user activity and access.

• Compliance certifications: Data storage and document management complies with GDPR, HIPAA, SOC 2, ISO 27001, and SEC requirements.

An organized data room streamlines the due diligence process and enhances transparency for stakeholders, potential buyers, investors, auditors, lawyers, and other advisors which can tip the scales in favor of a successful deal.

When do you need a data room?

Data rooms are the backbone of confidential document exchange and the due diligence process in deal-making. Private equity and venture capital investors conduct due diligence to investigate a company’s operations and financials to see whether the investment is viable. Some due diligence processes take a couple of weeks, while others take months.

During due diligence, a data room becomes your company’s trusted ally and asset. Modern virtual data room providers offer advanced functionality with drag-and-drop uploads, customizable workflows and templates, and real-time communication—where using traditional data rooms, complex excel spreadsheets, email folders, insecure document sharing drives, and open file sharing platforms could complicate an M&A deal or fundraising event.

M&A

During an M&A transaction, a data room centralizes documents, expediting review and allowing both the buyer to focus on the strategic aspects of the deal and evaluate the target company's value, risks, and synergy opportunities efficiently.

→ Guide: Download Carta's free guide to M&A deals.

IPOs

Companies considering an IPO typically spend several months preparing for the rigors of being a public company. Setting up a virtual data room helps the company go through the due diligence process with underwriters during the IPO process and facilitates fast and effective investor communication, helping save time and money. This transparency and accessibility are pivotal in facilitating a smooth and well-informed IPO process, instilling confidence in investors and regulatory bodies alike.

→ For a deep dive on IPOs, read our IPO Readiness Guide.

Download your free IPO Readiness Checklist here:

Fundraising

When you’re trying to raise capital, investors want to see your company’s costs, estimated runway, and funding needs. Having all of that information organized in your data room, along with a pitch deck and investment memo, can speed the process along and increase investor confidence. For instance, a technology startup seeking funding can upload confidential revenue projections, IP ownership documentation, and detailed financial records into the data room, which potential investors can access with appropriate permissions. This enables investors to conduct thorough due diligence, evaluate the company's growth prospects, and make informed investment decisions.

→ Video: Learn the basics of fundraising with Carta's free Startup Fundraising 101 series.

Other transactions

The truth is that any type of business transaction demands meticulous documentation and confidentiality. A data room simplifies the exchange of legal information, enabling authorized parties to access documents securely. This fortified digital environment not only ensures a smooth legal process but also simplifies intricate procedures.

Data room best practices

Here are some best practices in data room implementation. By taking these steps, you can properly secure the integrity of your company’s sensitive information, optimize the outcomes of critical transactions, and build trust with potential investors and partners. 

Access management

Not all parties need access to every document. Use permissions to control what information specific team members can see. For instance, an HR professional might not need to see the same detailed financial records as a CFO.

Intuitive organization

To create an easily navigable data room, establish a hierarchical folder structure with main categories, subfolders, and standardized document names. Include a master index for guidance and maintain clear access permissions. Regularly update the structure to accommodate changing needs and ensure documents are easily accessible and intuitively organized.

Periodic reviews

Regularly review your data room’s activity log to maintain security and monitor usage. We also recommend keeping your data room up-to-date periodically or following any material event. Old financial statements or outdated contracts can mislead potential investors or partners.

User education

User education for a data room is essential. Start by providing clear instructions on how to access, navigate, and search for information within the data room. Educate users on data security and access permissions, highlighting the importance of confidentiality and the consequences of mishandling data. Provide user-friendly training materials and sessions to facilitate familiarization.

Use watermarks

For ultra-sensitive documents, consider using watermarks to decrease the risk of theft or document alteration. Watermarks also discourage unauthorized file sharing or information leaks.

Creating a data room for investors

In a data room designed for PE and VC investors, you should include critical financial, legal, and operational documents that provide a comprehensive view of the company's performance metrics and potential risks.

Consider including the following in your data room:

• Cap table

• Pitch deck

• Financial statements (e.g., balance sheets, income statements, cash flow statements)

• Business plans

• Market analysis

• Evidence of Intellectual property ownership

• Legal contracts (e.g., partnerships, leases, and loans)

• Corporate governance documents

• Other information requested in the investor’s due diligence request list or relevant to the investment decision.

Data room pricing

Carta Launch customers and fund admins can create their own data room for free. Learn more or get started for free below.