Now, you feel like he's not worth what he's getting, and this happens. Actually, one of the most common reasons partnerships break down is because of perception of the other guy's work rate.

I'd look to negotiate a buyout for him. He does own some of the company. On your side of the story, it looks horribly unjust. But you know, there's his side of the story where he spends time thinking about the company, consulting with you, risks his money, etc. He's probably feeling like you're trying to screw him and that you're being terribly unfair as well.

Try to negotiate a buyout that includes him relinquishing all ownership of the company. He did put time and money into this and backed you with no guarantee of return - he's entitled to something. The court thing is a non-issue at this stage unless he's really vindictive, but it'll be like an ax hanging over your head forever if your project is successful, or you want to hire, or raise money, or anything else. Try to buy him out and go on your own way. When you negotiate, don't tell him how unfair it is, etc, etc. This just ticks people off without accomplishing anything. Just focus on how you don't think this is a good partnership any more, and you're sorry it didn't work out, and after thinking about it you'd like to buy him out, and then make a low offer and come up a bit.