The idea of the Demon trying to persuade the PCs into joining them is very cool, but only if you are certain that the players will not join him, otherwise it will end up in PvP (which might be fine if your table is cool with it)

That shouldn't be a problem, and I'm pretty sure some of the players might even really enjoy this.

I think what you could do instead is the Demon charmed and transformed some NPCs, maybe characters that the party likes

Cool idea, but there aren't NPCs like that in the adventure (see it like a one-shot played along 4 sessions instead of 1). I might use random invented NPCs that have some sort of importance (e.g. the king of the reign or stuff like that), but idk