Bringing my developer in house full time will provide a small short term lift in revenue with increasing value as the company grows and scales to multiple web properties. He isn't interested in salary as much as equity. My 50/50 business partner and I on the other hand are not interested in giving away equity. We are open to profit sharing, or any other creative solution that will continue to motivate and incentivize him for the long term without having to give up a % of our company. Any feedback greatly helps - thanks!
It is time for a very frank conversation with your developer.
Explain what you just outlined, that you and your partner are not interested in giving up equity in the company. Explain that you are open to exploring other incentive programs with him.
Unless there was an understanding earlier that your developer would be gifted equity, you have no obligation to provide such.
On the other hand, consider the worst-case scenario: what if he opts to walk away. What are you prepared to do and how will your company adjust?
I'm happy to discuss further. I've helped a number of small businesses and startups tackle difficult questions.