I might say, "I don't think I can do a startup with you and still maintain our friendship. And I'd rather be your friend." (Without telling him/her why you can't do a startup and still be their friend...)
nice.
i'm sure i have heard this one before ('a startup' => :sex)
Yeah maybe propose doing something else with him, that you'd want to do. Maybe he's really great tennis partner or something and you enjoy playing tennis, then you could do that with him instead. That's if you're close to him though. If it's my close friend and I'm in this situation, and my friend feels excluded, I'd assure him with: "I play tennis with you, but not with any of the other guys. You are an important friend to me".