A virtual data room (VDR) is a surefire ally for managing large data-driven projects or conducting complex financial transactions. VDRs offer a variety of dedicated features that make data sharing, distribution, and collaboration over it more effective, yet secure. 

However, the success of using a virtual data room immensely depends on the way you organize it first.

In this article, we cover the best practices for managing a virtual data room and offer a secure data room setup manual.

What is a virtual data room for businesses?

A virtual data room is a secure cloud-based repository for storing and distributing sensitive documents. VDRs provide a controlled environment where users can access and review documents remotely while maintaining strict security protocols.

A high level of security makes virtual data rooms suitable for storing such sensitive or confidential data as financials, intellectual property, legal documents, contracts, and more. 

That’s why many organizations use VDR for business purposes where the security of data matters: from legal proceedings to mergers and acquisitions (M&A), real estate transactions, initial public offering (IPO), and fundraising. 

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How to organize documents in a virtual data room?

Let’s now get to the best practices for document management inside a VDR that can significantly improve your overall VDR experience. 

Here are the main recommendations for a smooth data room organization. 

1. Start with a logical folder structure

Build your data room with a clear and logical folder structure that aligns with the purpose of the project or transaction. 

Use broad categories such as “Legal,” “Financials,” and “Operations,” and then create relevant subfolders (for example, “Contracts” and “Tax Documents”). 

This approach to organizing files in a data room helps users quickly navigate to the necessary documents without confusion, ensuring efficiency throughout the process.

2. Use a clear and consistent naming approach

Use a standardized approach to naming files and folders. Include relevant details like the document type, date, and version. 

This consistency prevents issues with version control and helps users quickly identify the correct documents, especially when multiple files are similar in nature.

3. Create index

Including a detailed index in the data room provides a roadmap for users. This index should outline the folder structure and document locations, helping users quickly understand where to find specific files. A well-organized index improves navigation and eliminates guesswork when searching for important documents. 

Fortunately, many advanced virtual data room providers offer dedicated features that make index management even easier, such as automatic index numbering.

4. Limit folder depth

Avoid creating a complex, deeply nested folder structure. 

Instead, opt for a shallow folder hierarchy, two or three levels deep if possible. This ensures users can find documents quickly without navigating through too many subfolders. 

5. Label files and folders

Proper labeling of files and folders enhances organization and ensures clarity. Use labels to highlight document types, categories, and statuses (for example, “Finance,” “Draft,” or “Legal”). 

This allows users to quickly understand the purpose and status of each file, improving efficiency when reviewing and selecting documents. What’s more, labels make it easier for users to find required files.

6. Ensure regular version control and updates

Implement a system for version control so that users always have access to the latest documents. 

Store older versions in a dedicated archive folder, clearly labeling them as “Old” or “Previous.” Regularly update documents to reflect the most current information, and mark the latest versions as “Final” or “Current” to avoid any confusion. 

This practice ensures that the data room remains accurate and up-to-date throughout the transaction or project.

Managing user roles and permissions in a VDR

Modern virtual data room providers typically offer several levels of access controls so that VDR administrators can fully regulate who can access what in a data room environment. 

Here are the best recommendations for managing user permissions in VDR and, thus, ensuring document security and integrity:

• Determine user roles. Before setting permissions, identify the roles among users, such as admins, viewers, and editors. This helps in assigning specific data room access controls for groups based on their needs within the virtual data room.
  
• Set up role-based permissions. Assign permissions based on user roles. For instance, admins can manage settings and documents, while viewers may only access files without editing. This simplifies control and minimizes errors.
  
• Customize access levels. Fine-tune permissions for specific documents or folders. You can limit access to sensitive files for certain users or give temporary access to external parties when necessary.
  
• Activate two-factor authentication. You can also enhance security by requiring users to verify their identity through two-factor authentication. This ensures that only authorized users can access the VDR. This is especially important considering the number of data breaches worldwide and the rising average cost for each of them.
  
• Set expiry date for external users. When providing access to external partners or clients, set expiration dates for their permissions. This ensures that access is automatically revoked after a specified period, maintaining control over sensitive data.
  
• Limit access to certain IPs or locations. For added security, you can also restrict user access to specific IPs or geographic locations. This can be especially useful when sharing data internationally.

Best security practices for virtual data rooms

Now, let’s take a look at what can be done in terms of data room security to ensure confidential files’ confidentiality and integrity. 

These are the top data room security features to make use of:

• Encryption. Encryption transforms sensitive documents into unreadable code, ensuring that only authorized parties can access the data. With advanced encryption standards like AES-256, both stored and transferred information is fully protected against cyber threats.
  
• Watermarking. It makes unique identifiers, like usernames or timestamps, appear on top of documents every time they’re viewed, downloaded, or printed. This helps trace the source of any leaks and discourages unauthorized sharing by making it easy to identify who accessed or distributed the files.
  
• Redaction. Redaction allows administrators to permanently hide highly confidential information from specific users, ensuring only authorized data is visible. This feature is useful for secure document sharing of files that contain confidential sections, while still making the rest of the document accessible.
  
• Time-limited access. It restricts user permissions to a specific timeframe, automatically revoking the ability to view or download documents after the set period expires. This minimizes risks by limiting exposure to sensitive data beyond the necessary time frame.
  
• Remote shred. It enables administrators to delete or revoke access to documents even after they’ve been downloaded by a user. This feature provides greater control over sensitive data, ensuring it can be removed from any device, even after distribution.
  
• Fence view. It’s basically a digital sliding barred screen on top of the documents that restricts users from copying, screenshotting, or otherwise capturing sensitive content on their screen.

How to ensure compliance in a VDR

For a virtual data room to be secure, it also has to follow certain data room regulations and legal requirements for a VDR. 

This is what typically should be offered for compliance in virtual data rooms:

• Data protection and privacy laws. When using virtual data rooms, businesses must adhere to data protection regulations like GDPR, CCPA, or HIPAA when using virtual data rooms. These laws ensure that sensitive personal information is handled securely and protected against unauthorized access.
  
• Confidentiality and Non-Disclosure Agreements (NDA). Companies are often required to enforce NDAs within a VDR to ensure that all users agree to keep the information confidential. This provides a legal shield and prevents sensitive information from being shared or misused by parties with access to the data room.
  
• Audit trails. Regulatory bodies often require businesses to maintain accurate records of all activities within the VDR. Audit trails document who accessed files and what actions were taken, providing transparency and ensuring accountability in case of legal scrutiny.
  
• Compliance with industry-specific regulations. Some industries, like finance and healthcare, have specific regulatory requirements (for example, FINRA or HIPAA) for data handling. Ensuring that a VDR meets these specialized regulations is crucial for avoiding fines and maintaining legal standing.
  
• Data retention and deletion policies. Businesses must comply with legal data retention requirements, which dictate how long certain types of data must be stored. Additionally, companies need to establish secure deletion policies to ensure that data is properly disposed of once it’s no longer needed.

Summing up

Let’s now summarize the main steps to secure sensitive data in a virtual data room and ensure a proper data organization:

• Ensure a logical data room organization by creating a consistent folder structure, ensuring a clear naming approach, creating an index, labeling files, and providing regular version control and updates.
  
• Set up user-based access permissions and activate two-factor authentication for full user access control.
  
• Ensure data security by using such security VDR features as redaction, watermarking, fence view, remote shred, and encryption.
  
• Make sure a data room helps your business meet certain legal and regulatory requirements by offering audit trails, NDAs, compliance with industry-specific regulations and data privacy laws, and data retention and deletion policies.