Soundcloud caused controversy recently by letting Universal Records delete content and now it's becoming clear why. Soundcloud, Universal, Sony and Warner are said to be on the cusp of a deal, one in which the music hoster gives the labels royalties and up to 15% of its business in exchange for not getting sued.

Anyone running a user-generated content site needs to seriously consider the implications of its users uploading infringing material, because it’s pretty much guaranteed to happen on a very large scale indeed.

Once the world’s largest recording labels and movie studios see this happening, things can go bad quickly, unless certain preventative steps are taken. Bringing the business into line with the DMCA is a necessary first step, one which will see the hosting site respond to takedown notices in a timely fashion.

Other sites have gone a step further. As underlined by the MegaSong debacle, YouTube gives some big record labels the right to take down content they don’t like, even if there are no apparent copyright infringement issues. YouTube doesn’t appear to get involved much in the process either, leaving the labels to decide what goes and what does not.

Another company that headed down that route recently was SoundCloud. The audio upload site has been coming on in leaps and bounds over the past five years, in part due to the popular and sometimes illegal content uploaded by its users. Recently, however, it was revealed that not only had the company given Universal Music the ability to take down infringing content, but to do so without oversight.

YouTube allows the labels to do that because it struck a distribution deal with them, but why would Soundcloud follow suit? News today suggests that this particular question answers itself.

According to a Bloomberg, Universal Music, Sony Music Entertainment and Warner Music Group are “closing in” on a deal with Soundcloud which will see the service obtain licenses to host and distribute content from these major labels.

An anonymous source familiar with the negotiations said that the deal will not only see the labels getting a share of future Soundcloud revenue, but Universal, Sony and Warner each picking up a 3% to 5% stake in the business.

On top of that and most importantly, Berlin-based Soundcloud will receive assurances that it won’t get sued, a valuable stability that US-rival Grooveshark is unlikely to enjoy anytime soon.

No one involved in the talks is speaking on the record, but sources suggest that the agreement would value Soundcloud between $500 million and $600 million, not bad for company that was nibbling at the heels of MySpace just five years ago.

The 200 employee company is definitely on the up. One year ago Soundcloud reported having 200 million unique users, but by November 2013 that had increased to 250 million.

A target of one billion users leaves Soundcloud with plenty to do, but with the threat of large-scale litigation off the table, the process will be much, much easier.