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?