The company currently has over 100 users who pay a monthly fee of $200.00 per month, and they charge an inital set up fee of $10,000.00 - His plan is to not have more than 1000 users nation wide

How do I know If his offer is a good opportunity or not ?

How do you know if this is a good opportunity?  Simple.  How do you get your money back? What alternatives do you have for that $150,000?  Will your lifestyle change if you lose that $150,000, or can you afford to kiss 100% of that money goodbye and not miss it? 

Let me give you some help as you think about those questions:

• If there is no clear path to liquidity, then you should pass on this opportunity. 
• If there are better alternatives for that money (i.e., safer, liquid investments that will earn more), then you should pass on this opportunity.  You might be better off sticking that money in a CD, or buy stocks of publicly traded companies, or investing in yourself or in a situation where you have control of the investment.  This guy is offering you a minority position.  It is doubtful you'll have a controlling position.
• If you cannot afford to lose 100% this money, then you should pass on this opportunity.  Are you an accredited investor?  If not, then you should probably pass on this investment.  And if you don't know what an accredited investor is, then you should absolutely pass on this opportunity

Sounds like this guy has built a nice little business.  He's generated $1 million ($10,000 X 100 users) from set up fees (assuming he actually got the $10K from all 100 users, has he given any discounts?), and he currently generates $20K per month in revenue, or $240,000 per year (again, assuming all 100 users pay full price).

He says the company has been evaluated at $2 million.  By whom?  By what process?  And if the company currently has a valuation of $2 million, why is he trying to sell you a stake at a $2.5 million valuation?  ($150K/0.06=$2.5mm).  If the company has a valuation of $2 million, then your $150K investment should actually buy 6.9767% of the company ($2mm + $150K = $2.15mm.  $150K/$2.15mm = 0.069767).

The valuation he's trying to use on you is over 10X revenue!  And for a company that has a limited upside, that valuation is an absolute deal killer (for me).  For some reason, this guy is limiting user to only 1000, which means maximum revenues will only $2.4 mm per year.  Unless you want to be tied up with this investment for the rest of your life (an assuming he'll pay you a little interest each year), it's doubtful your little 6% stake will ever be worth anything...unless you two can find other suckers to buy your stock at even sillier multiples.  Even if this guy pays you a 10% interest rate, that's only $15K per year.  It will take you 10 years to get your money back, and you will have little/no recourse to get your principal back.  And if that's the scenario, then you've just risked total loss of investment and your payoff is breakeven after 10 years! 

Ask this entrepreneur the following questions: 

1. How will your investment be structured?  Are you being offered an equity position?   
2. Is he the only owner, or are there other owners?  Ask for a full capitalization table, and ask that every agreement, option, warrant, promise, and who knows what else is included.
3. How is the company incorporated?  LLC, s-corp, etc.
4. What will the money be used for?  Why does he need $150,000? 
5. Is the company profitable?  Is it cash flow positive?
6. How do you get your money back?  Will you take a percentage of the profits?  Do you get a cut of those nice upfront fees?  Will the money you invest earn interest?  What's the rate?  Are there any strategic buyers for this company whereby you could derive an exit by selling the company?  And who controls the decision to sell the company?  And at what price?
7. What are your rights, if any, as a shareholder/member/debtholder?  What if the business nosedives, do you have any downside protection? 
8. Why will the company limit itself to only 1,000 users?  If that number is met, that's only $2.4mm per year in revenue.  It's tough to create any kind of enterprise value with such low revenue potential.

Here's what I'd do.  I'd pass.  But if you really think you want to do this deal, here are some things to consider.

• Ask for the financials, including a month by month income statement since inception, the general ledger, cash flow statements since inception, current balance sheet, and full customer list (including what each customer pays). 
• Check the bank statements.
• Review the articles of incorporation/organization.
• Hire an attorney and have that lawyer draft a non-binding termsheet.  Once you and the entrepreneur agree to the terms, have your attorney draft the definitive purchase agreement. 
• Don't sign anything this guy gives you!  Have your lawyer draft every document, or, at a minimum, have your attorney review every document.  More likely than not, your attorney will have some changes to every document the entrepreneur gives you, and guess what?  It's OK to ask for changes in those documents before you sign them!  It's called negotiation.
• Do not buy stock or membership units or any other type of equity in this company.  If you decide to invest, your investment should be in the form of a convertible note.  The decision to convert to equity (or to not convert) should be entirely yours.  In the event of liquidation, debtholders are higher up in the foodchain.  Stock holders are at the bottom.  Only if the company sees a liquity event should you convert to equity.
• I'd negotiate a much better valuation.  For such a small company, I'd want my $150K to buy a majority stake that pays a very princely income.  If he isn't willing to do that, you're probably best advised to pass on this opportunity.  There are other uses for your money!

Let us know how it goes.

Dr. VC
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Cynicism is not an end, but a means to reach objectivity.

Ben