Good answers all around, but I feel one aspect deserves more attention:
Get it under your skin that employee != founder.
- Founders have a rich set of emotions to draw strength from, they are energized by their own vision of the company's future, and by their social standing as entrepreneurs in society.
- Founders share richly in the future profits of the company, which makes it rational to work like a slave for a few years, in the hope maybe of never being forced to work again.
Employees have none of the above. Employees treasure a good working environment, and are happy to get exciting work tasks -- but at the end of the day they work to live, not the other way around.
(There are exceptions, of course, I know. But as a rule it's pretty much correct. Sometimes the employee has a large stock options pool and the market appears virgin. Some employees are simply so energized that they behave as founders (treasure them).)
OP did not mention anything about this person's stock options / equity compensation. I'm harsh here, but if this person doesn't have equity, then what OP is doing is simply exploitation. If this person does have some ownership, then what OP is doing can be ethically fine, but it can still be counter-productive in practice for the reasons given by others.
We don't want to treat our employees like, well...employees.
That is unavoidable. If you have decision power over another person's sole income, then you're his boss (in commercial life). You may not be aware of this, but he will have it in the back of his mind.
You shouldn't treat your employees as 'just employees' -- but you should treat them as respected employees in a great company with competent, enlightened leadership.
We don't want to have a corporate boss-employee dynamic
You have it already, for the same reason as above, it will always be on the employees mind. To highlight your options by drawing up the extremes, you can choose on a spectrum between:
- you can be a bad, insecure boss by being an amateur with regards to management responsibilities, and zig-zagging in your daily management.
- or you can be a good boss, by taking care of your responsibilities, and having open and clear dialogue with your employee about his work.
HTH, and all the best!