Private investor asking 85% ownership

Yes, taking 85% ownership from day one, and thus leaving the entrepreneur with just 15% is crazy. And almost certain to get the company killed; since the entrepreneur will be unlikely to feel sufficiently motivated by 15% to work like a slave for a few years.

On the other hand, reading between the lines, it sounds a lot like you asked for 1 million dollars without having anything real to show. Do you have a working prototype, do you have some early adopters who have purchased the product and are using it now, or at least have expressed a strong need for the product? If not, you're going at it all wrong, and you won't be able to attract good investment.

he wants to be a "silent" partner, so I'm the founder and all the work is on me

Another big red flag. "Silent" partners often end up being anything but silent. And this isn't what smart, successful investors would say -- on the contrary, smart money would let you know that they have connections within the industry which your startup will benefit from.

Before I did anything else I would verify that he A) has funds, B) can spend them. People with a million dollars to invest in a single startup venture are not the sort of people that negotiate that way.

Don't do it. 85% is not fair for any deal and is not in the spirit of being a partner. Partners want to help each other not screw each other and this is setup to be a bad deal that will get worst.

Yup, that is crazy.

The general ownership rule for startups (fully diluted) is 40-40-20. Founders-Investors-Employees. Profit share may be great in the short term, but it is secondary to your ultimate exit strategy. Are you banking on your profits or looking for an acquisition? Hard to say without knowing more about your business.

You need to be very careful before agreeing to something like this. Make sure:

• The transition conditions are clearly spelled out, and tolerable and achievable for you
• You'll get enough money yourself to live on, and to make whatever payments may be needed to gain ownership

Here's an example of what can happen if you don't do that - it sounds astonishingly like how you could wind up around your salon/lounge.

A friend of mine had gone through instructor training in an international franchise-based system (United Studios of Self Defense), and they put him together with an investor to open a new school. It was similar to your deal: the investor put up most of the money and took most of the profits, but my friend was supposed to be able to buy him out over time. I believe the transition was agreed to under a "handshake deal" rather than being put on paper.

My friend was an exceptional martial arts sensei, got named Instructor of the Year for the entire international organization, and the school was very successful - but all the benefits went to the investor. My friend wound up sleeping in the school because he couldn't afford an apartment, let alone buy out the investor. And the investor? He was making lots of money, and didn't want to give up ownership.

My friend was finally about ready to just give up and close the school... when there was a happy ending.

Several well-off people who knew him through the school got together and loaned him enough money to buy the investor out at a price that was higher than was discussed during the "handshake deal". After he was free of the investor sucking all the money out of the school, my friend was suddenly quite comfortable. He paid off the loan, opened a second school location, bought a house, and eventually sold the two schools for enough money to kick back and travel the world for a year with his girlfriend. They got married, and had enough money left over to open a fitness studio, which they're both still running.

That guy is nuts and so would if you accept such a deal. Think your idea through. Lower your expenses if you can't find investors for a higher end establishment. Also many a times you can be high end as well cheap if you try to find a niche which did not exist before. It's value can come form it's uniqueness. I would say you try to go for some sort of financing wherein you payback the investor from your club's earning with interest and keep it separate from your profits.

Don't get involved with this guy.