I think a lot of people are missing an important point here: C2 was written so that they won't ever have to make a C3. C2 should be well written enough that they can incrementally improve it without having to do any sort of major rewrite. As such, that makes the normal model of paying for a new version obsolete.
However, I think when used with something getter77 said, it might work. I like the idea of having paid members get access to all of the stuff that's in development for the next version.
Imagine this: each year, construct has a new version released for users of the free version that includes all of the newly developed features over the past year.
People who have paid get access to the features as they are developed. Users of the free version have to wait for the next free version.
The people using the free version will hear about all of the cool features in development and want to use them, so you get a constant cycle of enticing people to buy.
Also, I think the nag screen should display an ad. Not anything that you have to wait through, or at least no more than 5 seconds, but that way you can still get some revenue from users off the free version as well. The important thing is to keep the nag screen from being annoying enough to make people pirate C2.
I also like the ideas above about the second two years costing less than the initial purchase, and "choose your free version" since people can't agree on what they'd like from the free version - have a nag screen or splash screen, take your pick. The problem there is if what if they change their minds when they're done with a game? But it's an interesting idea.