From what you say your VC is a vindicative and manipulative SOB who is wielding his veto power as blackmail to nix a deal unless you agree to give him more than his agreed upon terms.
It's a nightmare scenario. If it was me I would play hardball back. Walk away from the whole thing and let the company melt down, better that all should lose than he should win and all you should lose. Alternatively maybe he comes to his senses, but you have to be willing to carry through with it. I hate playing hard ball, but once you find yourself with someone who is going to do that, you have to play hard ball back or you'll lose for sure.
If you do decide it is all for naught and you are probably going to bail, I recommend you open source your code base for some plausible business reason, and then wait a few months before leaving. This way you'll be able to recover your own work for use in future ventures should it come to that.
Obviously you picked the wrong VC but why on earth would you give him such veto power. That was your mistake and now you are paying the price. Oh well.
Even the YC 'Series AA' model document terms include protective provisions where a majority of the preferred shareholders have veto power over any merger/acquisition.
It's a customary provision, and this previously-supportive investor may have had the majority of an early round. So even if his shares, if converted, would only be a small percentage of the company, he may have effective veto power.
In the end you're counting on the decency and reputation of your investor(s) that they don't turn out to be the kind of people who think, "can I squeeze a few more bucks out of this deal if I'm willing to blow it up, and don't care what people think of me?" (Or even if, in the investor's real peer group, he can tell it as an impressive war story of his negotiating prowess.)
It'll be dressed up as something else – "I'm not receiving a proper premium for my preferred privileges!" – but is really just a bet that their toughness/ambivalence can force other shareholders to cave.
I suspect it's a more likely tactic with investors whose background is in other older, and more zero-sum industries. (The similar experience I mentioned in my other comment was with someone from the government-granted telecom franchise field.)
It's a nightmare scenario. If it was me I would play hardball back. Walk away from the whole thing and let the company melt down, better that all should lose than he should win and all you should lose. Alternatively maybe he comes to his senses, but you have to be willing to carry through with it. I hate playing hard ball, but once you find yourself with someone who is going to do that, you have to play hard ball back or you'll lose for sure.
If you do decide it is all for naught and you are probably going to bail, I recommend you open source your code base for some plausible business reason, and then wait a few months before leaving. This way you'll be able to recover your own work for use in future ventures should it come to that.
Obviously you picked the wrong VC but why on earth would you give him such veto power. That was your mistake and now you are paying the price. Oh well.