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Chang observed that a popular, legally dubious startup with a large user base now has plenty of leverage in negotiations with record labels, which might ask for equity rather than (or in addition to) a cash settlement. Such deals confer legitimacy on companies once at loggerheads with labels, while allowing both the startup and the labels to get what they really want: a share of the proceeds from a music service everyone's using. I asked Chang to clarify what he meant, and whether this pattern could be expected to repeat itself. "That's the new model," he said. "The royalty structures for ad-supported streaming music are too high for startups that haven't scaled yet, so they have no choice but to infringe in order to get to scale." Chang doesn't hold stakes in any streaming music services, but Norwest previously invested in Mercora Inc., a pay-to-stream service that's since changed its name to Social.fm. Chang said at the conference that Social.fm is "looking for a way to gracefully wind down operations." Chang and Norwest have also invested in music messaging service Mozes Inc. Lawsuits, he added, don't usually occur until the startups already have substantial user bases, by which time the companies have some leverage. "A lawsuit is foreplay to a licensing deal," Chang said, adding that such settlements often include equity stakes that can be worth more than the labels originally sought in their complaints. In the case of YouTube, Google Inc.'s $1.6 billion acquisition paid out handsome rewards to record labels that took equity in the startup. Universal Music Group Another panel addressed the difficulties in setting licensing and publishing rates, both domestically and internationally, for new-media services. After watching four attorneys address the headaches of categorizing new services in decades-old legal code, I couldn't help but agree with Chang and conclude that for startups, the best strategy is to launch an infringing service, wait until someone demands money, and negotiate until everyone's happy. These lawsuits may be a "gun-to-the-head" approach by the labels, as one blogger put it, but Chang's analysis implies that plenty of power lies in the hands of the companies whose services prove to be popular, however legal or illegal they might be. "These startups give users what they want," he said. "That's why advertisers and labels will pay attention." -- Paul Bonanos UPDATE: I confused the UMG-Imeem deal with a separate settlement between Imeem and Warner Music Group. Warner did take equity in Imeem after dropping its suit, but an Imeem spokesperson says the equity was exchanged for cash rather than for a license. UMG never sued Imeem, but it did invest in exchange for equity as it struck a licensing deal. I apologize for the error. Imeem's story still fits with the larger picture, though, of companies that infringe on copyrights to scale their user bases until they become both lawsuit targets and attractive investments for labels.  Deal Video
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During a venture capitalists' panel at the 
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