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Napster Inc., the Bay Area start-up that brought online music piracy to the masses, teetered on the brink of bankruptcy Tuesday as it struggled to transform itself from industry outlaw to ally. Company founder Shawn Fanning and two other top executives resigned, and the company told employees it was insolvent after a deal with global media conglomerate Bertelsmann collapsed.

Barring the arrival of any last-minute funding, people close to Napster expect the company to seek bankruptcy protection within days.

Napster’s demise would leave the major record labels and music publishers, which sued it for copyright infringement, trying to collect damages for the billions of unauthorized copies of songs that Napster users made. But the music industry wouldn’t be left empty-handed: It still has two appeals court rulings that effectively outlaw networks such as Napster’s.

Bertelsmann, which lent Napster at least $85 million to help develop a legitimate version of its service, might end up with the company’s assets if it goes into bankruptcy protection. And if it does, it’s likely to resurrect the Napster brand with a fee-based service that compensates the music industry for its works.

The bankruptcy filing appeared imminent after Napster’s board missed a Monday deadline to sell just its assets to Bertelsmann, a major investor in Napster said.

Ron Conway, whose investment fund has poured more than $1 million into Napster, blamed “self-serving, greedy, out-of-control egos” for the collapse of the latest talks.

Conway said the failure of the venture capitalists on the board to strike the deal meant not only that Napster’s shareholders would be stranded but that its 70 employees also would lose their jobs.

In the event of a bankruptcy, Bertelsmann isn’t guaranteed to walk off with Napster’s assets because the labels and publishers still want to be paid, said attorneys Carey Ramos and Jeffrey Knowles, who represented various music publishers in the lawsuit against Napster.

Tuesday’s developments were the latest in a series of setbacks for the Redwood City-based company, a pioneer in online file sharing that has yet to profit from the innovations of its 21-year-old founder. Fanning was 18 when he wrote the code that powers Napster.

The company’s free service skyrocketed in popularity two years ago, drawing tens of millions of consumers with easy-to-use software that let them copy songs from each others’ computers through the Internet. But the music industry’s copyright-infringement lawsuit eventually crippled the service, and Napster couldn’t win the licenses it wanted from the major labels to launch a legitimate subscription offering.

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