Data Room for Initial Public Offering: Benefits and Must-Have Features

What is IPO stand for? An initial public offering, commonly referred to as an IPO, is when a private company offers its stock to the public for the first time.

Today, the number of IPOs is growing because they are effective for raising capital. For example, there were 951 IPOs in the United States in 2021 — twice as many as in 2020.

However, going public is a long and tedious process that takes approximately two to four years. In addition, it requires processing a tremendous amount of data and constant collaboration with many external parties. To facilitate the process, companies use virtual data rooms.  

What is a data room IPO? How can businesses benefit from a VDR? What’s the best way to choose a data room? What features are most important? Find the answers in the guide below.

What is an IPO?

An initial public offering (IPO) is when a private corporation becomes public by selling its shares on a stock exchange for the first time. After an IPO, the company is no longer privately held — its investors own it. 

Usually, an IPO takes place when a company can’t raise enough money from private investors. That’s why it offers shares to the public in exchange for capital. In such a way, it can raise funds, grow, and expand. 

The IPO process is highly complex. It includes due diligence, regulatory compliance creation, price setting, and marketing. Companies that want to launch an IPO need to hire investment banks to deal with a large amount of work.

Famous examples of IPOs include Alibaba Group ($21.8 billion raised), Visa ($17.4 billion raised), Meta ($16 billion raised), and General Motors ($1.8 billion raised).

Pros and cons of IPOs

Let’s learn the potential benefits and drawbacks of going public.

Pros

  • Raising capital
  • Higher share valuation
  • Corporate debt reduction
  • Increased public awareness
  • Credibility enhancement
  • New employee attraction
  • Exit opportunity for founding individuals

Cons

  • Time commitment
  • Distraction from business
  • Missed opportunities
  • Expenditures on underwriting fees (4-7%)
  • Market pressures
  • Potential loss of control

SPACs vs IPOs

An IPO is when a private company becomes public by selling shares on a stock exchange with the help of an underwriter.

SPAC stands for a special-purpose acquisition company. It buys a private company, which then goes public without paying for an IPO. 

Many businesses prefer SPACs over IPOs because they:

  1. Allow faster execution. Usually, IPOs take twice as long as SPACs.
  2. Provide price certainty. In a traditional IPO, the share price can fluctuate depending on the demand and market conditions. However, once the price is agreed on in a SPAC, it’s set. 
  3. Provide access to expertise. Ordinarily, SPAC sponsors are very experienced financial specialists. Their expertise is really helpful during the SPAC process. 
  4. Reduce regulatory burden. ​​​​​​​The regulatory requirements in a SPAC are less strict than in an IPO.

However, there are critical disadvantages as well: 

  1. Shareholding dilution. SPAC founders keep a 20% stake in the SPAC as “sponsor promote”. Consequently, a company going public loses a fair amount of its equity and suffers dilution.
  2. Compressed timeline. Because of the time limits prescribed by the SPAC requirements, SPAC founders often target and acquire companies with weaker financials than a typical IPO.
  3. Poor diligence requirements. Compared to a traditional IPO, a SPAC process doesn’t require rigorous due diligence. This may result in an inadequate business evaluation or even judicial proceedings.

A virtual data room for IPO: Top 4 benefits

An IPO is a time-consuming, complex, and expensive procedure. It involves many specialists, like auditors, regulators, investment bankers, lawyers, and accountants. All of them have to deal with a large amount of information regularly.

Thus, a company needs a space where all involved parties can store, share, and manage confidential data. A virtual data room is a tool designed specifically for that purpose. Its functionality helps to make the IPO process run smoothly and efficiently. 

Let’s see how an IPO data room can benefit businesses going public.

Strong security

Virtual data room providers have developed advanced security features to ensure confidential data is highly secure during an IPO. Among them are user permissions settings, strong encryption methods, two-factor authentication, digital watermarking, and audit logs.

24/7 access

Files stored in a virtual data room are available anytime and anywhere. VDR administrators can adjust various levels of access for multiple users and groups, set access expiration dates, and see user and file activity. Altogether, it increases the company’s stakeholder reach and facilitates decision-making.

Saved time and money

Having all data stored in one virtual space, there’s no need to travel to review or share documents. The need to meet in person to discuss IPO processes is also eliminated. It saves a lot of time and money. Additionally, VDRs decrease expenses on rent, site security, staff salaries, paper, and printing. 

Effective communication 

Some still argue that remote communication can never replace a live conversation. However, virtual data rooms support the opposite. Communication tools like messages, emails, video conferences, audio calls, and discussions in threads demonstrate how effective it is to use VDRs for IPOs. 

Top 5 reasons for using data rooms for IPOs

A virtual data room in the fundraising process plays a crucial role. Let’s examine the main reasons why businesses choose VDRs for IPOs. 

  1. Synchronize processes. Due diligence, document management, and communication can be done simultaneously on one virtual platform. No need for additional tools. 
  2. Manage documents in one secure place. The success of an IPO depends on how securely and properly a company’s documentation is organized. A VDR lets businesses store all files in one space and keep track of all changes.
  3. Track the progress. The majority of data rooms offer reporting and analytics tools. Admins can see who viewed files and for how long. They can also see where they focused their interests. This provides admins with great insight into what is going on with the IPO process.
  4. Solve common IPO software challenges. A virtual data room eliminates the need for additional software and tools like emails, calendars, or Excel trackers. Users can manage all communication and document management processes within one platform. 
  5. Manage IPO due diligence. Because of the complexity of due diligence IPO procedures, companies going public use the services of virtual data rooms. The features they provide make the process faster, easier, and more transparent. 

How can a VDR facilitate the IPO process?

Let’s take a look at the four main stages of an IPO and how a data room can help companies at each step.

Stage 1. IPO planning (up to 1-2 years)

  1. Hire management experienced in maximizing shareholder value.
  2. Reexamine a company’s organizational processes and policies.
  3. Set all company documents in order. 
  4. Do internal audits.

Stage 2. IPO preparation (6-12 months)

  1. Prepare a company presentation for underwriters, analysts, and investors.
  2. Hire an external IPO team (bankers, lawyers, auditors, and advisors).
  3. Start IPO due diligence.
  4. Create an offering memorandum.

Stage 3. IPO transaction (1-6 months)

  1. Prepare financial information for the first draft of the offering memorandum.
  2. Submit IPO regulatory filings.
  3. Go on an IPO roadshow. Market the shares to institutional investors to generate interest and estimate the demand for shares.
  4. Set the IPO price based on investor demand and company financials.

Stage 4. Post IPO stage (being public)

  1. Execute the promises and strategies the company committed to.
  2. Assess IPO performance.

Role of VDR in the IPO process

  • Controlled and centralized document sharing
  • Access settings
  • Branded workspace
  • Fast and effective communication
  • Security compliance
  • Due diligence management
  • Access to analytics
  • Full document and activity control
  • Task management
  • 24/7/365 access from any device
  • Data room professional support

Data room must-have features for a successful IPO

When choosing a data room for an IPO, look for the features listed below. They help to automate the workflow, streamline the processes, and facilitate decision-making. 

Group of features Features
Document managementDrag-n-drop file upload
Bulk upload
Any file format support
Advanced search
Automatic index numbering
E-signatures
Document securityDynamic watermarking 
Remote shred
Fence view
Customizable NDA
Document self-destruction
Data backup
AccessTwo-factor authentication
Single sign-on (SSO)
Access restrictions
View-only mode
Sharing via secure links
Permission set on user/group level
Analytics and reportsAudit logs
Detailed reports
Notifications
CommunicationLive chats
Discussions in threads
Comments in documents
PollsVoting
Accessibility and usabilityMulti-device access 
Mobile device interface
Multi-language support
No plugins

A 5-step guide on setting up and using a VDR for IPOs

Here’s a data room set up guide to learn what steps to take to find the best vendor for successfully launching an IPO. 

1. Choose a virtual data room provider

There are many data rooms on the market nowadays. So, how does a company choose the right solution to meet its business needs? Let’s take a look at the following:

  1. Defining requirements. Creating a list of features the VDR should have. Additionally, they should consider the platform’s level of security, ease of use, accessibility, and pricing. 
  2. Data room reviews. Evaluating user reviews because they usually contain descriptions of the main features, use cases, pros, and cons.  
  3. Comparing data rooms. Finding or creating VDR comparison charts to see which providers best suit company needs.
  4. Testing the platform. Most vendors offer free trials and demo versions to let new customers test their tools and features.

2. Create and organize the data room

After choosing a data room, the next step would be to organize it logically so that stakeholders can easily find the documents they need. There are three steps to consider:

  1. Use the due diligence checklist to prepare all the documents required for a successful IPO.
  2. Create a file structure to organize the data room.
  3. Do the proper categorizing, ordering, and indexing.

3. Adding new users and setting access permissions

Adding new data room members is a quick and simple process. First, administrators need to email invitations to authorized users.

When configuring access permissions, there are a few things to keep in mind:

  1. Access level. As a rule, there are four user access options: viewing, editing, downloading, and printing. Note that not all data rooms allow for controlling files after downloading. Thus, it’s vital that admins grant user permissions wisely.
  2. Watermarking. A watermark is an image overlaying the document and showing the date or viewer’s contact information. It helps to protect confidential data, as admins can always see who viewed what, when, or if they edited a file.  
  3. Customizable NDA. Before accessing any document, a new user must agree to the company’s NDA.

4. Uploading files

Once all security settings are ready, confidential documents can be added to the platform. Uploading is fast and easy because of the features like:

  1. Bulk upload. Save a lot of time by uploading large volumes of data at one time.
  2. Drag-n-drop. Enjoy the simplicity of uploading documents — just “grab” an object and drag it to a VDR.
  3. Built-in document view. View files without leaving  the platform.

When uploading, the system maintains the file and folder structure inside the VDR.

Final takeaways

Here are the basics of the IPO process and the virtual data room’s role. 

  • An IPO is when a privately owned company decides to go public and sells its shares on a stock exchange. The process takes about two to four years. Its main purpose is to raise capital. 
  • An IPO requires that the company going public provides multiple external parties with secure and transparent access to its data. A virtual data room appears to be a perfect solution for that purpose. This is possible because of the high level of security, 24/7 access from any device, convenient features for file management, communication tools, and integration possibilities.
  • A virtual data room helps companies manage due diligence, store and share documents in one secure place, synchronize the IPO processes, and track progress. 
  • Among the most crucial VDR features for a successful IPO are dynamic watermarking, customizable NDA, two-factor authentication, chats, comments in documents, multi-device access, e-signatures, and bulk upload. 
  • To choose the best virtual data room provider, a company should define its requirements, get familiar with VDR reviews, compare a few providers, and test the platforms using the free trial or demo.