Data security has never been more important than it is today. News headlines are full of reports of data security breaches that cost companies millions and shatter the public’s confidence. In one notable case, telecommunications behemoth AT&T announced in March 2024 that data from more than 73 million current and former customers had been leaked on the dark web.

If you’re performing due diligence on M&As, regulatory audits, real estate transactions, or other sensitive deals, you understand that data security is not a want; it’s a need. To transfer files safely between stakeholders, you have two main choices – virtual data rooms (VDRs) and file-sharing software. Both include data security measures, but how do they compare?

Let’s examine these two types of platforms in depth. We’ll learn about each platform’s unique features and determine which one is best for your due diligence needs.

Understanding Virtual Data Rooms (VDRs)

In the past, sensitive documents relating to mergers and acquisitions, private equity, and venture capital transactions were stored in a physical room called a data room. This room had round-the-clock security, and access was only permitted to those entitled to inspect and report on documents related to the deal in question.

Virtual data rooms (VDRs) have now replaced secure physical data rooms, yet their purpose remains the same. They are an extremely secure repository for highly confidential documents, allowing for effective collaboration and streamlined procedures on complex transactions. They put the document owner in control, with controls set on access and how the documents can be used, even after they have been downloaded.

Security Features

Security is the paramount feature of VDRs. They use cutting-edge technology to ensure that access is limited to those with authorization. The following are some of the key security features that CapLinked VDRs employ:

  • Encryption: All data is connected using HTTPS. Structured and unstructured data is encrypted using 256.bit Advanced Encryption Standard using industry-standard block ciphers. In transit, data is encrypted with SSL/TLS-encrypted endpoints for ultimate security.
  • ISO 27001 Compliance: To keep data secure and private, only ISO 27001-compliant servers are used for hosting.
  • AICPA SOC 2 Certification: When you’re outsourcing the storage of sensitive data, you need to know you can trust the organization you’re working with. SOC 2 certification attests to the trustworthiness of the service provider, so only entrust your data to a company with these credentials in place.
  • EU-US Privacy Shield Certification: When operating across jurisdictional districts, particularly when working with the EU, compliance with data protection laws on both sides of the pond is essential. The Privacy Shield framework is a collaborative data protection act that ensures compliance with all relevant laws.
  • FISMA Compliance: Compliance with FISMA is essential when working with any governmental agency. Ensure your VDR supplier meets the controls of this framework to avoid data breaches and penalties.

Additional Features

In addition to enhanced security features, VDRs also offer advanced project management tools. 

  • Digital Rights Management (DRM) software: Controls access to digital assets and prevents modification by unauthorized users. DRM software encodes files, and gives the copyright owner full control over access, printing, copying, and editing of those files. Crucially, access can also be rescinded if someone no longer needs access to a document.
  • Project Management: Manage tasks, set deadlines, and track progress from a simple dashboard. Some VDRs, such as CapLinked, also provide concierge services that assist with permissions, white labeling, and data curation. Every event in each workspace is logged, allowing for effective auditing and monitoring.
  • Communication and Collaboration: Secure, confidential communication between stakeholders is essential to speeding up the due diligence process. With CapLinked VDRs, project managers can communicate with all users and individuals both in-platform and via email. Question-and-answer capabilities allow for the logging of discussions between stakeholders, providing a built-in audit trail.

Use Cases

Virtual data rooms can ensure data security in any deal that requires document sharing. Yet, there are several use cases in which they are particularly valuable:

  • Corporate mergers and acquisitions
  • Bankruptcy and restructuring
  • Compliance auditing
  • Private Equity and Venture Capital Investments
  • Real estate transactions
  • IPOs
  • Legal compliance

The potential use cases are endless. Whenever you need a completely secure space in which to manage a sensitive project, VDRs are your go-to solution.

Understanding File-Sharing Apps

Most of us use file-sharing apps every day for tasks as mundane as photo storage and managing our personal documents. Some of the best-known are Google Drive, OneDrive, and Dropbox. They allow us to share files quickly across the internet for both personal and professional purposes and allow collaboration across a range of file types.

File-Sharing App Features

File-sharing apps also take data security seriously. However, they generally do not provide the same levels of protection as VDRs. Depending on the individual application, some security features may include:

  • Encryption: File-sharing software encrypts files when sending them but offers a more limited level of security than VDRs.
  • Access Controls: Allows users to set basic access permissions. However, they are much less granular than those on VDRs.
  • Link Sharing: File-sharing apps often allow users to send links with varying levels of access control via email or messaging apps. While this seems convenient, if the links reach the wrong person, they can pose a security risk.
  • Audit logs: File-sharing apps may have basic audit logs, but these are not as detailed as VDRs and cannot be used for reporting. This makes it harder to track exactly what has been done on each document.
  • Collaboration Challenges: Users may be able to collaborate within documents, making edits and leaving comments. However, collaboration is not centralized around a main dashboard. Plus, there may be no project management tools for disseminating messages, assigning tasks, and creating Q&A audit trails.

Use Cases

At first glance, VDRs and file-sharing apps may appear similar. But a quick look at the appropriate use cases shows that file-sharing apps have not yet earned their place in the ultra-security-conscious world of due diligence:

  • Personal Use: Store and share files, photos, and videos with friends and family easily when security is not a priority.
  • Small Business Collaboration: When collaborating with other small businesses, store non-sensitive information, share files, and manage documents.
  • Education: Teachers can distribute assignments, receive homework, share resources, and provide feedback to students.

The Difference Between VDRs and File-Sharing Apps

The biggest difference between virtual data rooms and file-sharing apps is their approach to security and regulatory compliance. VDRs are effectively file-sharing apps for the big leagues when you need to protect sensitive information above all else.

Some key differences include:

  • Detailed Permission Settings: VDRs allow you to drill down to a far more granular level when setting permissions. You can restrict not only what a person sees but also what they do with the document. File-sharing apps simply do not allow you this level of control over your documents, putting them at risk of being leaked or misused.
  • Regulatory Compliance: VDRs like CapLinked comply with industry-standard and international regulatory frameworks, including GDPR, HIPAA, and FISMA. This makes them suitable for highly regulated fields, such as government, healthcare, law, and finance.
  • Cost: File-sharing software often provides a limited amount of storage for free and then charges relatively low amounts to store more. However, with VDRs, you get a lot of features besides document storage. You can expect to pay a fee per workspace that allows a set number of administrators and unlimited guest users. Bespoke solutions may also be available.

VDRs vs File-Sharing Apps: The Right Solution For Your Needs

The differences in features and use cases highlight that it is not possible to substitute one for the other. For example, if you were to attempt to coordinate a corporate merger using a file-sharing app, the chances for documents to be lost, misused, or shared with unauthorized parties is high.

With VDRs, you are in full control. You can manage the entire life cycle of the data room. You create the file storage structure, set permissions, and track user activity. If a stakeholder is no longer engaged, removing their access to documents is as easy as adjusting a few settings. 

If you are undertaking due diligence, VDRs also have niche tools that can simplify the process. These include features for indexing, searching, and Q&A, which allow stakeholders to retrieve information and communicate more efficiently.

The key takeaway is that while file-sharing software is great for everyday tasks, they are simply not up to the mark when it comes to security and compliance. For high-stakes transactions, you need virtual data rooms.

Choose Ease and Security With CapLinked

With CapLinked’s VDR solutions, you really can have it all. A secure platform for high-stakes transactions that you can access from anywhere. Our intuitive dashboard makes a VDR as easy to use as file-sharing software but with all the advanced due diligence features you need.

Organize documents, set up timelines, track progress, and manage permissions all in one easy-to-use workspace. Our Enterprise customers also benefit from customized team training, plus data migration and setup services. 

Request a quote and join the more than 250,000 professionals who already trust CapLinked today!