I'm comfortably familiar with the series, but I'm not really a longtime fan - however, I find that wikis are surprisingly helpful for filling in the blanks, since fan-made pages tend to be very accurate, and any tampering is usually obvious. So long as you use that to give an accurate depiction of how magic works in this universe, the history/rules of the Grail War, etc., neither you or anyone else should be left too far out of the loop.
Much of the fifth Grail War is set up by the fourth - over half of the masters involved in the fifth are directly related to the fourth, Gilgamesh sets the stage at the end of the fourth, etc... doing an AU of the fourth would be simpler to handle story-wise.
As for the sign-ups, you could try for a mix - open up the first seven slots as Masters, and if there's a demand for more openings, you can open up Servant positions for players to "pair up" with pre-existing sign-ups. Given previous participants in the Grail Wars, it might not be far-off to allow non-Master slots as sign-ups (for example, Saber's master in the fourth grail war worked very closely with a partner, and there are various instances of mages participating indirectly through manipulation of the Masters).
In the end, though, it would be much safer to regulate the game to seven character slots, as you noted. Seven is still just on the small size of an average player base for something with a definite end.