A new entity should only run you a few hundred dollars through Clerky or similar. Your investor ought to be willing to cough that up, or you can probably put together a pitch deck (freshly inked licensing deal in hand) to attract a new investor in the new entity.

Your terms of licensure would not be strictly monetary, either. Make them $1 plus X percent of new company revenues over the next three years. Even if that X is substantial it's mostly going in and out of the same pocket.

I suppose if you wanted to fold the old entity up now, you could, but murky ownership of IP and assets could be a millstone around a new company's neck in the form of legal exposure from the CTO ("they cheated me out of my equity!"). Better the old entity goes out with a whimper, rather than a bang.

However, finding a way to buy out the coworkers 5% and fire them may also be a reasonable strategy. The CTO should be aware at this point that your business is close to dead in the water and may believe there’s not much value left for them to extract. If they don’t think the investor is interested in putting more capital in and runway is running out, they could sell that 5% cheap. But you also may run the risk of demoralizing any remaining employees if they also believe the runway is gone.