Some good answers here, let me add:
I would definitely NOT apply and then try to avoid having your friend see you when you show up for the interview, like trying to schedule an interview when he’s out of town. Surely if you get the job, he’s going to find out sooner or later, and at that point it will be far more awkward than it would be if you told him up front.

I’ve had two times I’ve gotten involved in new business start-ups by friends, and both times it ended badly. Not horrible, we were screaming at each other, friendship ruined forever badly, but things didn’t work out, I wanted out of this deal but now it’s awkward badly. Any time something like this comes up, I find myself thinking, If this doesn’t work out for whatever reason, is it going to ruin our friendship? And do I value the job or whatever the deal is more than I value the friendship?

I think the best you can do is talk to your friend, tell him you saw the ad, you think you might be qualified, etc, but you realize it could be awkward, what do you think, I really don’t need this job so if you say you think it’s a bad idea it’s not like I’ll be unemployed and living in a cardboard box, etc. As someone else said, I’d try to make it easy for him to say please don’t.

I would definitely NOT apply and then try to avoid having your friend see you when you show up for the interview, like trying to schedule an interview when he’s out of town. Surely if you get the job, he’s going to find out sooner or later, and at that point it will be far more awkward than it would be if you told him up front.

I’ve had two times I’ve gotten involved in new business start-ups by friends, and both times it ended badly. Not horrible, we were screaming at each other, friendship ruined forever badly, but things didn’t work out, I wanted out of this deal but now it’s awkward badly. Any time something like this comes up, I find myself thinking, If this doesn’t work out for whatever reason, is it going to ruin our friendship? And do I value the job or whatever the deal is more than I value the friendship?

Before going to the interview, you can send a note (I would prefer that over a phone call) that you had applied for this position and you are appearing for the interview. You can express your concern anyway about conflict-of-interest but more likely than not he will understand the situation himself and ideally should keep himself out of decision making process.

Unless you desperately need this job, in which case it’s a whole different story. Then saying “please please give me a job, I’m about to lose my house and my children will be starving homeless waifs” etc might be your best bet.

So if his team-members decline your online application itself, then there is nothing for you to think! If they do call you for an interview, then you know that it is based on your merits and not because of your connections and you can feel good about it.