Best Structure for Investor Buyout

The company I'm an investor in requires a significant capital infusion, and is trying to find a structure to remove several current investors who are not participating in daily operations of company - basically people who invested cash and/or sweat but have moved on for whatever reason, myself included. We are trying to find a good model for freeing up equity by "buying" the inactive investors out with some sort of future disbursement that will kick in once the company begins seeing operating income.

So, if investor John owns 5% of the company, they agree to give back (or sell back at a very low rate) all their shares, in exchange they get an agreement that says once we make X much money, you will receive quarterly disbursements based on a percentage of operating income for X many quarters.

The other option would be to convert the investments into promissory notes, perhaps even a convertible one, but we wanted to minimize the number of book liabilities.

I am curious if anybody has had experience with such a structure. I'm open to suggestions for other structures that accomplish a similar result - free up equity now, in return for "royalty" payments in the future. Our investors are all on board with the concept, but perhaps there's a better way of executing. It's an S Corp, by the way.

Let me know if I need to provide more info, thanks!

Why do you think you need to "free up equity?" This idea is, well, non-standard. If new money needs to go into the s-corp, new shares are issued. Everyone is appropriately diluted by the new issuance. Unless you have a situation where the company can't issue new shares because of overly strict protective provisions or can't amend the articles because the shareholders won't agree, then you seem to be describing a non-problem.

Why would any equity holder give up that set of rights for contingent income-based rights that are essentially the same, and give up votes and the benefits of fiduciary responsibilities of the officers and directors?

Selling equity for a note (convertible?!?) would at least give the holder a priority in liquidation, so that's a possible structure.

But, again, I think you need to re-examine your premise and describe the root problem you're trying to solve rather than a solution that you think fits.