Seems like:

* Your investor is 100% right about not negotiating with blackmail. You should absolutely fire Andrew soon. Your relationship with him is unrecoverable. (The demand to do it "tomorrow morning" is itself close to blackmail, and you could postpone a little to collect your thoughts and make a less emotional decision. It is hypocritical for your investor to reject blackmail while blackmailing you.)

* Your investor (and you should own some of this responsibility too) has screwed you over by expecting software engineers to work at a startup with an eternally-postponed equity discussion. I don't even understand how that works. You may need to compromise with your investor by firing Andrew (which isn't really a compromise; it's the right idea even without your investor's demand) but also insisting on an equity discussion immediately so that you have something to show the rest of the team that you're listening and want to treat them right.

* Andrew's threat to take the team with him is confusing. Where does he think they'll go? They probably want jobs that pay them money, and it seems unlikely he has one of those ready tomorrow. He (and you) may be overestimating their attachment to him. If he behaves like this among them, they may even completely understand why he's leaving.

Seems like some combination of firing him, and having an honest conversation with the remaining team where you say that this is solely about him and not them, you want to make things right with the them regarding equity, and having stern words with your investor is the way to go?

(I have no qualifications which make this particularly good advice to follow, to be clear. But maybe simply being detached from your situation is helpful.)

I appreciate your input and perspective. Thank you.

You should have given all the employees equity when they joined. It's better to give them equity sooner rather than later, but definitely before the next funding round (because the strike price has to be higher).

Employees with drone experience are in high demand right now. You have to give them equity to compete with other startups, as well as Amazon, Google, DJI, and others that can pay higher salaries.

Investors often have good advice from years of experience, but ultimately the CEO has to make the decisions.

I'm not a lawyer, nor an accountant, not even a cartoonist (sorry Scott Adams) - so my suggestions are solely based on my experience.

You don't mention how much you have invested in the venture. If the investor is paying for everybody's salary (including yours), then the golden rule applies (he who has the gold, makes the rules).

In the hi-tech space, execution is more valuable (in the long run) than finance. Does your investor understand that? If your ideas are really good, you could stall and find a new investor who has an acceptable view on equity.

Given that Andrew and software team want equity - are they willing to pony up funds? that way you might be able to bootstrap the business. If you are able to bootstrap the business, then I would fire Andrew but not the team.

If I were in your position, I would lock-out everybody. Shutdown the servers, etc to preserve the software. Then hardball negotiate with both Andrew and the investor - separately. At the same time seeking out other potential investors. It might take a couple of weeks, but in terms of the long-term I would see it as a risk worth taking.

He has invested all the capital. When we first started we were just an idea and now were weeks away from "flipping the switch"

All I care about is making the product. Not the money, or potential money. Its tough, our investor has also served as a mentor and stepping away from that mentality is difficult.

Your response clarifies a few things (but not all).

Assuming a couple things:

1) you have discussed any delays to flipping the switch arising from firing Andrew with your investor / mentor. And that he is Ok with that.

2) that your investor is prepared to pay any termination payments, especially those in-lieu of notice.

2) that you are paying your staff the going rate for the work they are doing.

3) that you have standard employment contracts - i.e. no soliciting, no rights to IP, etc

You will need to write a termination letter - which basically says that Andrew can have no contact with your staff, no rights to the code nor IP, nor compete in the technical area.

Ideally you have your investor there in the morning. You call in Andrew, give him the letter of termination and clearly say that if he tries any funny business then you will sue him. Then march him off the premises. You can send any of his personal stuff to his home later in the day.

Then you announce to the rest of the staff what you have done and that you need to pull together to ship. Once there is demonstrable results then equity discussions can take place. Invite any disgruntled staff to leave on the spot - with the same termination conditions as for Andrew.

I'm sure that some people will protest that I'm suggesting a heavy handed approach. That is true. You have cast your lot by committing to the product and your investor / mentor. Taking somebody's money comes with a commitment to them.

Both Andrew and the Investor sound like jerks to me. Sometimes you have to deal with jerks and sometimes you have more than one jerk to deal with.

Building a team that works well with each other is hard to do. I don't know at what stage the project is at yet, or if you have the equity to give to the team. How well are they paid? I figured if they are paid well like at least the average salary for their position, there is no need to distribute equity until the project is finished.

The problem might be that your startup doesn't have any income yet, so you can't distribute what you don't have.

I hope each member of the team has signed a contract, one that has a non-compete clause in case they do walk and take IP with them.

You need to look for another investor or do some crowdfunding to raise funds to replace him.

No matter what choice you take, fire Andrew or get rid of the investor or even do both, you will be in for a hard time.

Making an important decision like this under pressure of time is sure to result in a mistake. You need to understand why Andrew has put you against such an immediate deadline. Is it because he has another offer for his services? Is it something you said or did? Is there anyone on the software team that would be able to give you the whole story? You need to see this as well as possible from his eyes, forgiving his words as rash judgement if possible.

My guess is that Andrew sees something that you don't...maybe that the software, after a certain amount is complete, can be finished by others and his services won't be needed. On the other hand, did Andrew do this at a previous company? Do you know? I would think you need to find someone that can take over Andrew's place if you decided you wanted to go on without him? Do you have this person? Anyway, I would not fire Andrew. I would use the time he stays on to find a replacement and figure out how to replace him. Also try to document what he is doing. This kind of blackmail works once in the corporate world. If it gets out that he has done this in the past it will make him radioactive with others.

I think the first decision is to buy time. Any ideas?

Allocate options to the team. Fire the blackmailer.

Also, Andrew may be bluffing when he says the entire team will follow him out. Can he really get them all a better deal elsewhere? Could he ever get funding for his own company once word got out about how he blackmailed the current company?

It might be interesting to talk to the developers privately before firing Andrew to see if they're really on board with his plan. Maybe they can be convinced to stay. For example, the most senior one could be promoted into Andrew's position and be offered a raise.

That seems to be what has to happen. It unfortunate because he has formed a software union of sorts and is acting as a union rep. If I fire him I could potentially lose 2-3 others.

Possible but people are reluctant to jump ship when you make the traitor walk the plank. It's the sword in the back that drives the point home - if you'll pardon the pun ;-)