Ok, this is a highly contextual decision & whatever is written below is from the very little details given in the question & my experience of running a 30+ people early stage startup, been a founder for 4 years. Coincidently, I did the exact same thing a month ago & can imagine how hard of decision this might be. Also, am not a lawyer, please discuss with them for sure, preferably external & not internal one as there might be conflict of interest!

I'd say "Let them go without vesting"!

As you say, seems like the person has become the toxic component of the team & doing -ve work. If I were to guess, you didn't let them go earlier because of the "hope" you had & benefit of doubt. You could have let go of this person long time ago & not bothered abt all this but you wanted to give leeway. This person completely took advantage of the leeway.

Since you have a very small team, it must be close-knit as well. Hold a Townhall, show the evidence of what all you say i.e. slack message, github commits, emails etc. Your employees are not dumb. Explain how, the person to be fired wasn't cheating just the company or the founders but also rest of the team. You letting him go with esops is UNFAIR to the team, compensation for the work not done.

This will be the last time you justify your decisions to the team. Never let this happen again by investing in a stronger & more objective feedback system, if you have made your mind to let someone go, let them go ASAP.

I am sure Someone else must have been picking their off their slack, reward that person; don't keep the esops back, give it back to them team to the people who took care of the work that this person was supposed to. You letting him go with esops demonstrates your unfairness to the rest of the team; people who might have joined late & have none or much less esops contributing more.

This won't be the first time it happens & soon you will let go off someone with esops, which creates a contrast to show everyone that what happened is not usual practice at the company but a one time thing happening only under exceptional circumstances like this.

At last, expect a fallout, 1-3 people, talk to these people in private, give them more details & context than you gave in the Townhall. And if they go, they go because you would encounter the same entitlement as the person you are letting go off, sooner or later in one thing or the other.

Another option is no esops but give then a settlement, a % of a value of ESOPs if you can to be a bit more fair.

Also, depends upon the amount as well; if it's meagre, let it be. If significant, then you can't let it get away.

And Yes it can create a mess on the cap table as you grow larger. With bigger rounds you will have more due diligence & justifications to provide; close the chapter ASAP & move on!

and the best part for the last, you let them go, they are gonna create a ruckus within the team before/while/after they leave. Doesn't matter they leave with or without equity i.e. if they don't already plan on quitting right after vesting. They will contest the firing unfair anyway, and maybe fight you on the rest of the esops yet to be vested as well. You will face the flak then as well.

Each minute you keep the person in your mind, it costs your company an opportunity loss & mindspace + time loss to you.

PS - When I was first suggested to fire this person by my co-founder, I couldn't imagine doing it; thought our tech would collapse because of all the lost knowledge etc. Then we fired them & 2 more people left. Within 45 days, we are doing better than ever, had one of the most productive month in last 8 months but that's a story for another time.