Coming in to this late. You may have already resolved this, but I saw a little of myself in your friend, so I wanted to comment before reading the rest of the thread. I will read it all eventually.
So this was me when I joined a game early last year. I've played micro stakes for years, mostly nickel / dime no limit hold'em with $20 buy-ins. But as I spent more time here on PCF and started collecting chips, I wanted to play more often, so I sought out new games. On paper, my new game seemed like a reasonable step up. It was $0.25/0.50 with a $40 buy-in. But what I wasn't prepared for was a couple of really good TAG players and a maniac. The games played much bigger than I expected or had ever played before. Which to me meant either go back to not having a game to play, or get better!
I don't think you should change your game. Your friend needs to get better, and he needs to understand how to control his stack and buy-ins. You didn't say in the OP what your buy-in limits are? That is a much better area of the game that you can control. Set the buy-in level to such that everyone is comfortable understanding that they might lose 2-3 buy-ins. That's poker. Some nights you double or triple up, and other nights you lose it all. Plus, in my own opinion, limit hold'em is a very boring game. You might make your friend happy, but lose several other players.
I never go to this game of mine with more money in my pocket than I'm willing to put into the game and possibly lose. Usually for me that's about $100-120. Others at this game may have $500-1000 or maybe even much more in their pockets. And eventually there are $300-500+ stacks on the table. Maybe more sometimes. Every game! Your friend just needs to learn how to play short stacked in a game like this. Playing short stacked can actually be a huge advantage in NLHE if you know how to play TAG. But as long as he never puts more on the table than he is willing to lose, then I don't understand what he is "afraid" of?