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I would create a standard policy and practice to honor the parameter's of FMLA. That way you can stick to the 12 weeks, unpaid leave offering. You're close to 50, so it's something you'll have to do eventually. Also, people have needs regardless of your company size - denying them this will just make them go work for a larger organization with better benefits.
$70k raise?? Are you hiring?
First mistake...paying him to stay. That cycle will never end. Having a baby is a big deal so as much as you can try to accommodate his request. If you allow the permanent work from home be prepared for others wanting the same. If you don't want WFH employees or don't want it as a work option then don't start. Employers are going thru hell trying to get away from WFH since covid.