Set up your Virtual Data Room or VDR to close your deal or raise capital on time and on budget
Executive summary
Virtual Data Room Best Practices for Capital Raising and M&A
Virtual Data Room Best Practices for Capital Raising and M&A
This article explores the role of Virtual Data Rooms (VDRs) in capital raising and M&A transactions, highlighting their importance in securely sharing confidential company information with potential investors or buyers.
Key points:
- VDRs provide superior security, compliance features, and access controls compared to standard file-sharing services
- Proper organization through structured folders is essential for efficient due diligence
- Traditional due diligence processes face challenges when documents are uploaded in stages, creating inefficient back-and-forth communications
- Modern solutions like Due improve efficiency by allowing documents to be directly attached to specific requests, creating clear visibility of outstanding items
- Implementing these best practices not only streamlines the due diligence process but also presents your company professionally to potential investors or buyers
Background
Whether you're selling your company (share sale) or a company raising capital, you are likely to be asked to share commercially sensitive and confidential information about your company with potential buyers or investors (buyers and investors are used interchangeably in this article). The documents could be tax, legal, intellectual property, finance, corporate, etc. Then buyers can review the company's documents and assess whether the information will affect whether they want to proceed with the transaction and/or affect how much they will pay for the company. This data is normally shared via a “Virtual Data Room” or “VDR”.
There are lots of VDR options available for sellers or companies to use. Some even opt to use products within their existing IT infrastructure (e.g. Microsoft Sharepoint) so they don’t need to transfer data to a third party provider, and to keep transaction costs to a minimum.
Why do companies use a VDR and not share information via email or a low cost file sharing service such as Dropbox?
Data security
VDRs offer enterprise-grade security features including advanced encryption, multi-factor authentication, and detailed access controls that standard file sharing services typically don't provide.
Compliance
VDRs help companies meet regulatory requirements (like GDPR, HIPAA, or SOX) with features for maintaining audit trails and documenting who accessed what information and when.
Due diligence support
During mergers, acquisitions, or fundraising, VDRs provide structured environments for sharing sensitive financial documents, intellectual property, and other confidential information.
Access control
VDRs allow granular permission settings, including the ability to restrict printing, downloading, or screenshotting of documents, and to revoke access immediately when needed.
Professional presentation
A well-organized VDR presents information professionally to potential investors, buyers, or partners.
Activity tracking
VDRs provide detailed analytics on who viewed which documents and for how long, which can be valuable intelligence during negotiations.
Large file handling
VDRs are optimized for handling large collections of documents without the file size limitations common in email or basic file sharing.
How do I set up a data room?
After selecting your preferred VDR, the next step is to import a folder structure that you can add documents to. An organized folder structure helps people find what they are looking for.
Download a standard folder structure that you can import into your data room.
Depending on the sector and industry of the seller or company, you might need to adjust the standard folder structure.
Buyer's initial requests for documents
For a share sale, the buyer may prepare an Initial Request List (or IRL) of documents and information required from the seller and/or company. The IRL might be sent as an Excel file or Word document and the seller and/or company will upload the requested documents into the VDR.
Below is a list of example requests from the buyer under each folder.
Corporate
- Articles of Incorporation
- Bylaws
- Corporate minutes (Board and shareholder meetings)
- Stock ledgers and capitalization records
- Organizational charts
- Joint venture agreements (incorporated)
Material Contracts
- Customer contracts
- Supplier and vendor contracts
- Joint venture agreements (unincorporated)
Finance
- Loan agreements
- Credit facility agreements
- Security agreements
- Guarantees
Real Estate
- Office and facility leases
- Land purchase agreements
Employment
- Employment agreements for key executives
- Severance agreements
- Non-compete and non-solicitation agreements
- Consulting agreements (including IP assignment)
Intellectual Property
- Patent licenses
- Trademark licenses
- Software licenses
- Technology transfer agreements
- IP assignment deeds
Litigation and Disputes
- Settlement agreements
- Demand letters
- Cease and desist letters
- Notice of claims or potential claims
- Contract breach notices
Download an Initial Request List if you would like to see what types of documents you should prepare to disclose.
What are the challenges with the current approach to look out for?
The approach outlined above can get messy because the buyer needs to check what has been uploaded to the VDR against the IRL to see what is missing (if anything). It is common for the seller/company to upload requested documents in stages, depending on when the relevant departments can get the information together.
The advisors and teams are ready to get started and generally don’t have time to wait for all the documents to be provided before starting the review. Often it is only when the document review is underway does it become apparent that documents are missing or incomplete.
This is where the process can get unwieldy as if there are documents requested but not uploaded to the VDR, the buyer and seller/company go back-and-forth requesting documents.
How does our approach solve these challenges?
The approach we take with Due in this regard is for the buyer to upload Due's template initial request list straight into the data room. When the seller/company uploads their documents, the documents can be “attached” to a request. This helps the due diligence process more efficient as the buyer knows that request the document relates to and buyers can clearly see if a RFI does not have a document attached in which case they can follow up with a further request.
Conclusion
In conclusion, while the traditional approach to data sharing during capital raising and M&A transactions serves its purpose, it often leads to inefficiencies, miscommunication, and delays. By leveraging purpose-built solutions like Due, companies can streamline the due diligence process through direct request-to-document mapping, reducing back-and-forth communications and creating clarity for all parties involved.
As you prepare for your next funding round or exit, consider how your data management approach impacts not just security and compliance, but also the overall experience for potential investors or buyers. A well-organized, transparent process reflects positively on your company's operational maturity and can help maintain momentum throughout the transaction.
As you prepare for your next funding round or exit, consider how your data management approach impacts not just security and compliance, but also the overall experience for potential investors or buyers. A well-organized, transparent process reflects positively on your company's operational maturity and can help maintain momentum throughout the transaction.