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The Fisherman was a fictional character within Spongebob that parodied the average horror villain, being a literal fisherman that would hunt down fish and use his hook to pull them to the surface (presumably to a gruesome fate).
Despite being a fully fictional character only seen in his titular film franchises Squidward used Spongebob and Patrick's fear of the character to play a cruel prank on them by dressing up as the Fisherman and terrorizing them after they scared themselves stupid watching a Fisherman movie.
However Squidward's prank backfired horribly when Spongebob and Patrick became convinced the Fisherman had "ate" their "best friend" and viciously beat Squidward until he was flung out of the costume.
He is based on the Fisherman, the main antagonist of "I Know What You Did Last Summer" (despite the fact Spongebob is often considered a children's show it frequently references adult material, such as the Fisherman (obviously toned down so as not to actually scare children or offend parents) ).