I very much dislike this hodgepodge of myth and lore and theology called TOTF.
In the end it really doesn't matter if you run away because ... spoiler:
Spoiler You are still the demon you just are in denial of it and therefore prolong the story about being in denial of it. There really isn't a good path in this mod just a denial of being as evil as he asserting you really are. Kind of like the converse of trying to play evil in most of vanilla Oblivion - you can but none of the reasons you do anything matches the challenges ahead of you.
But what I found that worked to get away from the 'scary guy' was to buff agility and speed just prior to talking to him then click through the dialogue as fast as possible - if you have it turn invisible - then bolt. Know the path you just came from and jump from stair set to stair set.
If not then use the console to type the letters tcl - to turn off collision and just rung where he can't back to the exit.