Ask HN: Ever been screwed around by a bigger company?

We are a small startup and have run into some trouble with a client over software. While starting up, we had a client that didn't have faith that we could deliver a product to them so we agreed to deliver them a product for a very low (insultingly low) cost. There were no conditions set up before we started that we would provide source code, just a verbal agreement that we would give them the finished software and that they would go on to sell it for us.

The reason we agreed to do it for such a low price is that they promised they would sell it on to their customers and we would then get to bill them for their subsequent sales. They have reneged on this and have decided they want the source code and will go on to develop it themselves.

So we designed it for them, and they love it, and they want to own it, source code and IP. We never agreed to this and we want to get paid for our work. The two options we are considering are to offer to sell them the IP and source for a decent amount of money, or to productize the software ourselves.

Just wondering what your thoughts were, if anyone has any legal considerations or precedents, or if anyone has dealt with a similar situation.