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 ;-)