All participants weigh in on Day 1. Each participant sets a goal percentage of loss throughout the contest. If you meet your goal, you collect. If you don't, you pay. All money paid is allocated pro rata based on total percentage of your goal. As an example, assume the entry fee is $100/person.
5 participants A sets 5% B sets 10% C sets 5% D sets 10% E sets 5%
Let's say A, B, and C fail to drop the amount of weight they set. They each owe $100, so the pot is $300.
The total goal percentage set by D and E is 15%. D gets $200 of the winnings ($300 * (10/15)). E gets $100 of the winnings ($300 * (5/15)).
This would reward everyone who accomplishes their goal, while encouraging aggressive goals because your payout is tied directly to what you set as a goal.
I'd be in for something like that. Like DD, I don't want to stop lifting in the interim, and there's no way I can "win" a challenge like this if I'm weight lifting 5 days/week.