It's great that this employee has been transparent about the fact another company wants him. The problem is that this employee is ambivalent about his connection to your Company. Really, under 100 employees at least, this is unacceptable.

I would first reflect on why you think he's looking elsewhere. Then, I'd ask him that, admitting that you have failed to create an environment in which he has stayed engaged and motivated on what he's working on. If his answers seem reasonable and you can commit to making the changes necessary, then you won't need an employment contract, he'll stay on his own desire, because you listened to him and improved his situation.

If his requests seem unreasonable or you know you won't be able to make those changes, fire him *today.* This situation can contaminate your entire company quickly. Yes, swapping someone out will always be a bit of a setback, but you want *everyone* on your team, feeling motivated and excited by what they're doing. It sounds like you're making your decision out of fear (having to find and hire another engineer) versus what's best for the Company, long term. Happy to talk to you in a call. Problems like this are within the sweet spot of my skills and passion.