What is a data room?
A data room is a private digital space used to share confidential files with external parties. Data rooms allow you to monitor who accesses your files and when. Key features include the ability to block downloads or screenshots to avoid confidential data from falling into the wrong hands. An average data room license will cost in the mid-to-high hundreds of dollars per month, often with an annual or multi-year contract.
When do I need a data room?
Data rooms are typically used during fundraising, during merger or acquisition discussions, or when seeking capital from LPs—but “need” is a strong word.
You might choose to use a data room:
- When you can afford the cost
- To impress an investor or LP (really)
Beyond your pre-seed “friends and family” round, many investors will expect you to have a data room simply because it’s what’s done. A data room is essentially window dressing around a shared folder, and it can signal to investors that you’re a mature business ready for the next step.
Which data room provider should I choose?
There are many data room providers, large and small. In our experience, there isn’t one provider that leads the pack.
Most, if not all, data room providers will give you the basic functionality that you need to keep your sensitive data safe: role-based access, logging, watermarking, and the ability to restrict downloads and screenshots.
If cost is an issue, look for a solution that allows you to subscribe month-to-month. Most businesses do not need to have an active data room at all times.
What if I can’t afford a data room?
If a data room platform is entirely outside of your budget, you can build a DIY data room using your existing file storage solution. While this workaround lacks the showmanship of a data room, it can fulfill your need to safely share sensitive and confidential documents.
How to Homebrew a Data Room
- Create a top-level data room folder. We suggest naming it “Data Rooms - External”.
- Create separate folders for each company you’re sharing with. These folders should be nested within “Data Rooms - External”. Let's say you're sharing information with XYZ Capital and ABC Capital. You need to nest folders to ensure that visitors cannot see or identify other entities that are viewing your data rooms. Your folder structure should look like this:
- Data Rooms - External
- XYZ Capital
- ABC Capital
- Add your data. This may include slide decks, financial statements, legal agreements, cap tables, and any other documents critical to your fundraise. Copies of each file should be added into each investor’s designated folder.
- Invite users to the appropriate folders. When adding external users, ensure that all permissions are set to view only. They should not be able to move, delete, copy, download, or otherwise mess with your data at all.
- Set expiring permissions (if available). Some file storage solutions allow you to set an expiration date for a user’s access. When this feature is available, it should always be used to ensure that an external party doesn’t accidentally have access to your data room long after your discussions have ended. The expiration period depends on your specific fundraising timeline. Generally speaking, it should be between one and six months.
- Review files and permissions on an ongoing basis. Set a regular cadence to review data room contents, deleting or replacing outdated files that you no longer want investors to see. During the same review process, you should review the list of users and revoke access as necessary—even if you have expiring permissions active.
How long can I use a DIY data room?
You can use a DIY workaround for as long as it serves your business. The decision to move to a true data room solution ultimately depends on the resources (funding) you have available, the types of investors you’re speaking with, and their expectations. For a deeper dive into the perceived value of data rooms, read Perception Versus Reality: The True Value of Data Rooms from Pliancy.
