Honestly it seems like there is an easy answer- No. 

"No SD, we can't have a baby in the house during our work hours, just like you cant take the baby to your office. However, we love grandbaby and would be happy to babysit once or twice a month so your and your husband can have an evening off/date night. " -- He wouldn't have to add the second part, just and idea!

Work From Home means exactly that: WORK. It does not mean you get to sleep in 'til 10am. It does not mean watching soap operas and eating bonbons. And it most certainly does not mean babysitting.

If, for whatever foolish reason, your DH agrees to babysitting (BAD idea) he should GET PAID to do it. And if it interferes with his or your ability to WORK, it needs to end ASAP. But he should certainly not be okay with babysitting DURING work hours.

I'd simply point out that you are at home because you are building a company, you are not sitting around twiddling your thumbs wondering how you are going to get through the day without dying of boredom. You do not have the time to play the babysitter. IF she's asking you to babysit it's because she really hasn't a clue of how much you really have to do/

Trust me on this one, it is virtually impossible to get any work done when you're babysitting. Don't do it. 

You need a good reason? Fine, here's one - if you start doing this it will snowball and you'll find yourself with this baby ALL day and every day and you might well find that she leaves it with you in the evenings too (well, it's easier than taking it home and then bringing it back so she can go out, isn't it?). Besides that, if you do it for her, there are many others who will line up to do the same. 

Nip it in the bud. NOW.

Unless your new business is a children's day care operation, how can your husband fully commit to running a start up business whilst looking after a baby? Anyone who has looked after a baby is fully occupied by the child.... Your DH can look after the baby if  your SD is prepared to pay whatever his hourly work cost consulting rate is - and I will bet you it is far higher than day care.
Anything less and your DH is not contributing to your business. He needs to make a choice: running and working in a business or looking after SD's baby.

I work in a partnership: I can take off as much time as I like... However it annoys people  when you can not commit to the hours and schedule you are on by being unreliable (outside of emergencies), and no matter what happens, I need to pay fixed costs and overheads owed to the business.  Working for yourself is a lot tougher in  that when you spend time doing things other than really working when required, the only person whose salary/income suffers is your own - and your business could tank.
On the other hand if one of my partners - or employees -  thought our workplace is a regular day care centre (again outside of emergencies), I would ask them to move on. A child does not belong in a work place.

Is your home-based business a daycare business? A babysitting service? If not, this is a big NO.

I work from home and no one respects it like a "real job." If you're just starting out, the last thing you should do is give ANYONE the impression that you're retired so your time is up for grabs. If you're full-time babysitting, you're not doing your real job full time.

Or, put another way, SD chose now to ask you to babysit. She didn't ask you to babysit when you were both working outside your home. That means she already has the impression that you home business is not a "real" business. You have no idea how huge a problem this may become.

The second issue is this. Your business is new. You don't know how it's going to shake out. There will be a lot of settling in to hit your groove. The last thing you need is someone else's toddler to care for. What happens when the kid is sick? What happens when you're sick? The next thing will be, "Hey dad, can you pick up junior today? I want to hit the gym before work." And then, "Hey, I want to get drinks with the girls after work. Can you watch junior until 7 p.m. tonight?" How will you say "no" then???

But this isn't just about the boundary pushing that we all know SD will do. Once you are on the hook for the kid's daily care, you won't easily be able to back out because SD will be depending on YOU so she can get to HER job. Her responsibility will now be your responsibility.

It's fantastic that you know this might be coming up. Good surveillance work, girl! So here's what I suggest. When it comes up, don't make it about SD. Make it about your business. Tell him you're being asked to take on a second job just as you're setting up your new business and you're worried you're both taking on too much too early.

If it appears your husband is pushing for this, at the very least, buy yourself time. Tell him it's too soon after taking on a new business, but you can revisit it later when you're settled in. Maybe it won't come up again. Or maybe it will become apparent that having a kid there on top of your work is too much for you two. That would be great.

But if it comes up later, that's when you need to really talk nuts and bolts. That's when you work out the "what ifs." Your husband is probably desperate to say yes to SD, so he won't be thinking about the reality of having a baby there. You must show him how much work a kid is AND you must clearly define what you are and aren't willing to do for this kid so he knows it will all be on him. You must talk about boundaries that will have to be addressed BEFORE that kid is dropped off even once -- as in, SD is there at exactly 5:01 to collect the kid and not a minute later no matter what. Or if the kid is sick, SHE stays home from work -- she doesn't dump a sick kid on you.

My guess is that once your husband hears all the parameters he will need to set with SD so everyone is on the same page, he'll be less likely to say "yes" to daily babysitting. More than anything, these husbands want to avoid saying "no" to these SDs. If he has to tell her, "Yes, we'll babysit, but not if the kid is sick and only between 9 a.m. and 5 p.m." that will sound dangerously like setting a boundary with SD and he'll want to avoid that discussion with SD.

Personally, this is one of those things I'd fight tooth and nail because it is FRAUGHT with trouble. And once you say yes, the boundaries will get shoved anywhere THEY want them to go and, as you expect, YOU will be on the hook for those shifting boundaries.

It's really out of line for your SD to even ask such a huge thing of you, especially when she doesn't need to (obviously someone is watching the kid now while she's at work). That alone would make me say "no."

I see a lot of people recommending he babysit while you work. Um, NO.

Unless I don't understand what you mean by "WE are starting our own business," no, I would not be OK with HIM babysitting during work hours while you work. If he wanted to be a babysitter, he shouldn't have started a business with his wife. If he wants to babysit, let it be AFTER work hours, when your business doesn't need his attention.

You said you worked years to make this business happen. Put the business in your name and let him babysit, OR tell him work is work, and work is not babysitting while you and SD go to work. Either he's in your business 100% (especially in these early months) or he's a retired full-time babysitter.

Imagine if he took a job for another company and told them after a few weeks on the job that he'll be bringing his 7-month-old grandkid to work so he can babysit for his daughter. How do you think that would go over?

This is crazy to even entertain.