A few points spring to mind here. First off, you are becoming your own company. You may want to incorporate yourself for tax purposes. Secondly, I'm not a lawyer, nor is there likely to be a lawyer member of PM that is willing to state they're a lawyer and give you legal advice (there may be lawyers, but they're not likely to give free advice, and that's not a slight on the law profession). So you may want to hire one for legal advice on contract law. However, before you do that, it really sounds like you need some project management course. A good intro course into what you need to do was something I took back in University - my "software project course" which did a really good job of talking about getting requirements, documenting what you're going to do, etc., prior to actually doing it. We spent 10 weeks of the course gathering and documenting requirements, 2 weeks coding it, and the last week was finals/presentations. And, to be honest, those ratios are actually not that far off my current experience in the field, 7 years later.

You're describing that you're finding yourself propelled 7-10 years into a drone's future (I would classify myself as a drone for the purposes of this thread - someone working for someone else, not themselves). You have no boss - you are your own boss. You have a client. You want your client happy so you get repeat business. That's called management in most other corporations.

To become an effective manager of a project, you should learn a bit about project management. It's a tried-and-true formula for working through a project, whether that project is organising a Christmas party at work, or it's building a skyscraper. The more money and risk associated with the project, the more important it becomes. CountZero pointed out that you should get all the information first. He's right. You start out with a verbal agreement on concepts, but you end up with a written agreement on concrete statements.

I'm actually taking an e-learning course that my company has given me on CD on project management. There's a lot there. But I can definitely see where it's useful. That may be a bit expensive for you. So, one cheap way to learn this stuff? Get a job doing it. Let someone else pay to train you ;-) Like I said, if you get a regular "drone" job, perhaps in 7-10 years you'll be doing all this stuff, and be better able to handle the responsibilities you're facing.

My brother-in-law started his own company just recently (not in software). He knows the business inside out, the industry he's in - he used to be employed in the field before he struck out on his own. What he doesn't have a clue about, however, is the business of business. If he's not careful, he's going to have his company collapse - from being too successful. ;-) IMO, it's worth it to pay for professional services: lawyers, accountants, etc. And to learn project management.

What I don't want this little rant to do, however, is turn you off your opportunity. You're going to have an old acquaintance as your first client. Getting that initial verbal agreement that some of the code (business-specific) will be his, and some of the code (non-specific to his business) will remain yours, and then getting it written down later when you know more precisely where that split is (but before you start writing anything) will probably be less painful than it could with an adversary that doesn't know you personally. Your acquaintance is looking to you as someone to build a relationship with where there already is something to build upon. So you probably have a fair bit of leeway of good faith upon which to negotiate. But still get it in writing at some point before you turn over the code. Use the proceeds from this arrangement to help pay for some project management course(s), though. It'll be worth it if you wish to continue on your own. :-)