Smart Answers

Q: I'm about to raise money for a small amusement park. How soon before I need to repay my investors? --K.G., Houston

A: It depends how the investment is structured. Typically, venture investors in an unproven company want as much as 60% equity in your company and expect returns of three to five times their money over three to five years.

If you don't want to give up so much equity, you can structure the investment in the form of mezzanine financing, where you guarantee investors interest payments generated by cash flow.

The advantage? In general, mezzanine investors want far less equity, usually about 25%. The risk is that if sales don't take off as planned and you fall behind on payments, investors can demand monetary and equity penalties that could strain your company and reduce your ownership stake. "It's better to give away more equity up front and give yourself a buffer when it comes to payback," says Peter Cowen, an investment banker based in Westwood, Calif.

During the first year or more of a startup, Cowen notes, most businesses don't enjoy positive cash flow. So be cautious before you put your amusement park on the investment rollercoaster.

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