There are plenty of students who are very bright, do outstanding jobs on their projects and homework, and otherwise get fantastic grades who then freeze up and get a C (or worse) on every test. Thankfully most real life situations don't mirror test taking, so often they're still high achievers.
Most job activity doesn't resemble a tech interview, so it's quite possible for this person to not freeze up ever after you hired him.
That said I'd still never hire this guy on the no false positives principle. I have neither the time nor inclination to contract with everyone who gets to that stage. But I rarely have projects for which a short term contractor could make much of a contribution. I suppose that's probably not the case for a lot of startups.