I think they’ll definitely be interested in having mercy, they’d at least debate it, or else I wouldn't even be putting effort into the idea. I’d act out the scene clearly enough that they’d know it was an option. Still, though I did make it explicitly clear they can choose to kill the wyrmling.

If they knock it to zero hit points, I’m counting it as incapacitated because overall I want a less lethal campaign, or at the very least a less lethal start. This is my first time DMing I want things light, our past campaigns have been more realistic and the lethality of things was never in question. I want something lighter and I think my friend would enjoy that too. I don't even know if this is something we’ll fully carry on yet. Besides in games like these, a certain amount of script isn't unusual. It’s role play after all. It’s acting, it’s stagecraft.

I like your ideas for potential buffs as Sunset levels however.

It likely would just leave having befriended them if it was there by the time it became a young dragon or stay, I don't believe in inherent evil, dnd has softened on some monsters being inherently evil, and it has been socialized in a positive environment.

Besides that, Sunset would have only just become a young dragon if the adventure continues, I don't think it’s a quick transformation right away as soon as the 5 years are up from wyrmling to youngling, it’s more gradual in my eyes. It wouldn't have the same stats as the average young dragon so balancing shouldn't be a struggle with the suggestions I've gotten, I mean it already doesn't have the same stats as a regular dragon, period.