My gut reaction would be to just let it be. Telling him that he can't sell it will lower his morale and possibly hasten his departure for a firm that doesn't mind (or for the project itself should the income prove to be at least enough to live off).

Does the item have value? He might be interested in selling it to you. If an employee likes his employer, they won't mind giving you their work for a little bit of money. You can always branch out into new areas.

Unless you're willing to make the employee a partner at your firm, I don't think there's much you can do that wouldn't seem "evil" and you don't seem like the evil boss type. If they're a partner at your firm, they get to direct the firm to an extent and share in its profits. If they're just a wage laborer, they will leave when something better comes along and that's one of the costs an employer must beat - and similarly the employee must bear that they cannot be paid the full value of their output as a wage laborer.

I'd say just let it be. Most web applications don't go anywhere. Be supportive and happy for him. In the case that it fails (or makes a few hundred dollars a month), he won't be leaving you and you'll come off as the awesome boss who is supportive of personal growth and chill with stuff. And that will make him stay even longer.