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I'd get honest with the guy real quick. You created his logo with the intention of using it for low-reolution screen applications, not print. There is nothing you can do short of re-creating that mess in Illustrator. Hopefully you've learned an important lesson about logo design, and business ;-)
I kinda figured I was stuck... but I thought it couldn't hurt to ask.Thanks for taking the time to answer!
By the way, honesty isn't an issue here. I warned him in the beginning that choosing that logo was going to result in printing problems in the future. Sometimes trying too hard to please a client gets you in as much trouble as not trying hard enough! I've been doing this way too many years to make a "rookie" error like this, but I guess I just got a little cocky thinking I knew what was best. I properly created the logo I thought he would choose and stupidly made a piece of artwork to illustrate why the lightning logo wouldnt work. I really do know better than to show a client a piece of work that I am not prepared for him to choose - I just got stupid for a bit. I am definitely paying the price now though!
The client is a really, really nice guy though. It's fun to work with someone who is so excited about his new business. I will make this work for him because that is the way I am. I would never tell a client - I told you this would be a problem - and leave him holding the bag. I should have never shown him that logo in that condition, so it's my mess and I have to clean it up. I'm certainly going to lose money on this job, but outside of this logo mess, at least it's a fun job!