Hindsight is 20:20, but if money is involved, it's business not friendship.

So far, you are a grand down. It's your idea (can you prove that?). Throwing any more money his way is stupid.

If you re-write what he has done, he can accuse you of plagerism, reverse-engineering etc. (Whether he can make it stick depends on laywers and local law.)

Hire a third party who has never seen the code. Employ him, under short-term contract, on an hourly rate, to re-write the code from scratch--clean-room style--with only your verbal guidance and specificatons. Set aside a 'clean room' on your premises, devoid of anything except what he requires, for him to work in.

That ought to break the chain of ownership/copyright.

Consult a laywer. Have the laywer write to the 'friend' formally, stating that he was clearly under a verbal "works-for-hire" contract, and that his demands are in-breach of that contract. He might cave if the money source ceases and the threat of a 'stay' on him using the code seems plausible and backed up by the right terminology.

Good luck.