Do the math on what x% is in dollars based on your premoney evaluation. Give him the note for that amount and treat him as if he were a friends and family investor.
Good idea but this would require us to wait till we raise funding, and therefore have a valuation. We are wondering if there is a way to resolve this right now so that it doesn't complicate an already complicated fundraising process.
Have you pitched any VC's or angels? What premoney are you giving them?
If you don't have a premoney, then cut him a fair salary for the time he worked in a convertible note. The convertible note will be the optimal way to have a nice looking cap table.
I just suggest that you deal with this matter quickly while everyone is in a good mood. Success in a business after someone leaves can be dangerous...