[almosnow]

Just tell him, plain and square:

"When we started on this endeavour I was expecting you to behave/provide/take care of X and you are not doing those things that we agreed on (or the results you are delivering are WAY OFF the expectations that the company had on you). You cannot be part of this if you are not helping it getting better. I'm sorry but I don't want to continue with our business relationship."

Be honest (with him and with yourself), you DON'T WANT HIM and there's nothing wrong with it. The more transparent you are here, the better you'll come out of 'the negotiation'.

The negotiation: Wether you want it or not, he owns some part of the company, even if he had just been doing jack shit the fact that you invited him to your endeavour and you are still referring him as a co-founder means that he's ethically entitled to 'something'. Now, it's up to you to decide what is that 'something' that he deserves'; again, just be honest and talk about what would be fair for him to take.

Be honest! That's the only rule here and if he co-founded this thing with you (even though you knew he wasn't worth it, or didn't knew at all) chances are that you may be real-life pals; if that's the case, just solve it like pals, after all it's always better to have a friend than a dollar.