My illustration rate for that kind of work, in LA area is $80 per hour (which is on a low end of rates). I use that to estimate how long it will take me to do something... For example, If it's a two week worth of effort, it would be: 80 hours X 80 dollars.  This is for the type of the work that gives my client exclusive rights to images.
I don't accept future royalties,especially if the work you're doing is your bread and butter. It's a lot like someone asking you to lend them your rent money, till their idea ...maybe sells...  They want you to take the risk. You can do it, if you don't mind never seeing that money.

Don't be so flattered that someone is interested in your work, that you'll be willing to give away the farm.
Another pitfall to you developing the characters for his ideas is that it opens you up to endlessss revisions. You could be on the 5th revision of a character, and he may still not be happy with it.

Also, professionals draw up a contract that outlines details of what the work entails, and how it will be paid for. Lot of reputable pro artists also ask for retainers before starting work.

Hi, my namez: "NO, Bad Kitteh, NO!"  Whaz yurs?
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