It's the location where the database files (.mdf, .ldf) are stored. The log file can grow so you may want to put those files on a drive specifically for data. If you don't care or have a lot of drive space (who doesn't these days), I wouldn't worry about changing the default location.
Once you have set up the vaults I would recommend that you change the database recovery model to "Simple" to keep the database transaction logs from growiong too much. See install guide chapter 10 "Managing the SQL Transaction Log Size".
Also, don't forget to set up a database backup job.
-Tor Iveroth, SolidWorks technical support