How to handle dream sequence?

Definitely do theater of the mind. And use roll 20 to your advantage. Message players privately, and if they want to inform the rest of the party, it has to be in character.

Use your dream sequence as a story hook, not just an effect. Maybe bring up thoughts that are in the character's subconscious. Start things normally, then slowly twist things around. Use a lot of senses.

I recently did this in a game with a mindflayer. I had the party roll a will save to grab their attention. Each character dreamed they were leaning upright on a table, relaxed in the dark, a slow dripping sound echoing softly in the room. A loved one gently stroked their hands and face from behind, telling them that things were ok. For example, A half elf dreamt of his father, who told him he was proud of him. The father told the player to return to his mother, and tell her that he regrets leaving. (Bit of a plot hook)

Those who passed their will saves go through the dreams as normal, then begin to feel the restraints on their body, feel a warmth and moisture on the appendages caressing their face, then smell of blood. They futilely try to scream or move, to no effect. The fingers begin to wrap around to your face and interlock into a suffocating mask. When they feel the last bit of breathe leave their body, they awaken.