From a business standpoint, it's an unlucky break. From a personal standpoint it's a profound tragedy for your cofounder. If the business is viable this won't be the last encounter with bad luck. How this one is handled will set the company culture.
My random advice from the internet:
1. Google up "grieving process". You won't discover how to fix it because there ain't no fixing it. It might help you understand what your cofounder is going through and suggest constructive ways to help.
2. The tragedy effects all three of you. That's why there's demotivation and frustration. Group counseling might be a way to work through the current situation. Relationships are one the things that counseling strengthens.
3. Reframing your coworker's condition as grieving rather than depressed puts it in the right light. It acknowledges the proximate cause and places the sadness within a timeline. More importantly it recognizes that the condition is not pathological or a mental disorder. It's simply a healthy part of the human condition.
4. Suppose you and the other founder kick out the grieving cofounder. Afterwards, there's still just the two of you. It is nice to imagine that the business would be in the same shape that it's in now. But it won't be. It will have gone through the distraction and disruption of removing a founder. On top of the disruption and distraction that the death has already caused.
5. Ultimately the business decision is whether to lawyer up or to team up. I hate sports analogies, but here one would be managing a squad where someone has blown out an ACL. The person can usually return to full fitness but it takes time.
Good luck.