EMPLOYMENT AGREEMENT

Exhibit 10.1

EMPLOYMENT AGREEMENT

This Employment Agreement (this “ Agreement ”) is entered into as of February 20, 2008 (the “Effective Date”) between Digital Music Group, Inc., a Delaware corporation (“DMGI”), and Nathan Fong, a resident of 208 Melbourne Road, Great Neck, New York 11021 (the “ Executive ”).

Agreement

In consideration of the promises and the terms and conditions set forth in this Agreement, the parties agree as follows:

1.  Position and Duties . During the term of this Agreement, DMGI will employ Executive, and Executive will serve DMGI as its Chief Financial Officer, or such other position as assigned by the CEO. As such, Executive shall have such responsibilities, duties and authority as reasonably accorded to and expected of this position. Subject to the terms of Sections 7.5 and 8.4 hereof, additional or different duties, titles or positions may from time to time be assigned to or taken from Executive by the CEO of DMGI. Executive will report directly to the CEO. DMGI will not materially change Executive’s role as a critical executive in the finance function as relates to activities including but not limited to managing finance function staff; managing quarterly, annual and other relevant financial reporting to the SEC; overseeing pro forma financial projections; and the like; although it is understood that DMGI may assign and re-assign different roles to its financial executives including Executive, as well as vary titles, specific duties, reporting lines, and the like.

2.  Performance of Duties . Executive will be based at and perform his duties under this Agreement primarily at the New York, NY offices of DMGI. Executive hereby represents and warrants that he is free to enter into and fully perform this Agreement and the agreements referred to herein without breach of any agreement or contract to which he is a party or by which he is bound. Executive hereby further represents and warrants that he has provided DMGI with copies of any employment, confidentiality, non-competition or non-solicitation agreements currently binding upon him.

3.  Exclusive Service . Executive shall devote his full time and efforts (from a business perspective) exclusively to this employment and apply all his skills, effort and experience to the performance of his duties and advancing DMGI’s interests. Executive shall not be engaged in any other business activity pursued for salary, fees, profit, gain or other pecuniary advantage if such activity interferes with Executive’s duties and responsibilities hereunder. Executive will not engage in any professional consulting activity nor serve on any corporate boards except with the prior written approval of DMGI’s CEO, and Executive will otherwise refrain from engaging in any activities inconsistent or in conflict with the performance of his duties hereunder. However, the foregoing limitations shall not be construed as prohibiting Executive from making personal investments in a passive form or manner that will not require his services in the operation or affairs of the companies or enterprises in which such investments are made or from engaging in charitable, civic or community activities that do not interfere with his duties to DMGI.

4.  Compliance with Policies . DMGI has established policies, procedures and practices, and Executive will comply with and be bound by all such policies, procedures and practices from time to time in effect during Executive’s employment to the extent DMGI has informed Executive thereof. Executive will be employed in a position of leadership within DMGI and will be expected to faithfully adhere to, execute and fulfill all corporate policies established by DMGI, now and in the future, in addition to establishing systems for monitoring compliance with such policies by other officers, employees and directors, particularly DMGI’s Code of Business Conduct.

5. Confidential or Proprietary Information and Inventions .

5.1 Company Information . Executive agrees at all times during the term of his employment and thereafter, to hold in strictest confidence and not to use, except for the benefit of DMGI, or to disclose to any person, firm or corporation (except within the scope of his employment) without written authorization of the CEO of DMGI, any Confidential Information of DMGI. Executive understands that “ Confidential Information ” means any DMGI financial or operating information, contents of music libraries, data bases, technical data, trade secrets or know-how, including, but not limited to, research, product plans, products and processes, services, customer lists, channel partner lists, target acquisition lists and customers, channel partners and target acquisitions (including, but not limited to, customers, channel partners and target acquisitions of DMGI on whom Executive called or with whom Executive became acquainted during the term of his employment), market data, software, inventions, music processing techniques, formulas, technology, designs, drawings, engineering, hardware configuration information, marketing, financial reports or other business information disclosed to Executive by DMGI or prepared by Executive during his employment by DMGI, either directly or indirectly, in writing, orally, by drawings, or by observation of documents, technology or equipment. DMGI and Executive acknowledge that Confidential Information does not include any of the foregoing items which have become publicly known and made generally available through no wrongful act of Executive’s or of others who were under confidentiality obligations as to the item or items involved.

5.2 Third Party Information . Executive recognizes that DMGI has received and in the future will receive from third parties (including, but not limited to, vendors, customers, channel partners and acquisition targets) their confidential or proprietary information subject to a duty on DMGI’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. Executive agrees to hold all such confidential or proprietary information in the strictest confidence and not to disclose it to any person, firm or corporation or to use it except as necessary in carrying out his work for DMGI consistent with DMGI’s agreement with such third party.

5.3 No Prior Inventions . Executive represents that, as of the Effective Date of this Agreement, other than musical composition and sound recording copyrights, he has no inventions, original works of authorship, developments, improvements or trade secrets which were made by him prior to his employment with DMGI, which relate to DMGI’s business, operations, digitization processes, music library or research and development.

5.4 Future Inventions . DMGI shall own all right, title and interest (including patent rights, copyrights, trade secret rights, mask work rights, sui generis database rights and all other intellectual and industrial property rights of any sort) to any and all inventions (whether or not patentable), works of authorship, mask works, designs, know-how, ideas and information made or conceived or reduced to practice, in the whole or in part, by Executive during the term of his employment with DMGI to and only to the fullest extent allowed by applicable law; provided , however , the foregoing shall only apply to any of the foregoing that are directly related to the business of DMGI (collectively referred to herein as “ Inventions ”). Executive agrees that he will promptly make full written disclosure to DMGI, will hold in trust for the sole right and benefit of DMGI, and hereby assign to DMGI or its designee,

all his right, title, and interest in and to any and all Inventions. To the extent allowed by law, this section includes all right of paternity, integrity, disclosure and withdrawal and any other rights that may be known as or referred to as “moral rights” or the like. To the extent Executive retains any such moral rights under applicable law, Executive hereby ratifies and consents to any action that may be taken with respect to such moral rights by or authorized by DMGI and agrees not to assert any moral rights with respect thereto. Executive will confirm any such ratifications, consents and agreements from time to time as requested by DMGI.

5.5 Maintenance of Records . Executive agrees to keep and maintain adequate and current written records of all Inventions made by him (solely or jointly with others) during the term of his employment with DMGI. The records will be in the form of notes, sketches, drawings and any other format that may be specified by DMGI. The records will be available to and remain the sole property of DMGI at all times.

5.6 Patent and Copyright Registrations . Executive agrees to assist DMGI, or its designee, at DMGI’s expense, in every proper way to secure DMGI’s rights in any Inventions and any copyrights, patents, mask work rights or other intellectual property rights relating thereto in any and all countries, including the disclosure to DMGI of all pertinent information and data with respect thereto, the execution of all applications, specifications, oaths, assignments and all other instruments which DMGI shall reasonably deem necessary in order to apply for and obtain such rights and in order to assign and convey to DMGI, its successors, assigns and nominees the sole and exclusive rights, title and interest in and to such Inventions, and any copyrights, patents, mask work rights or other intellectual property rights relating thereto. Executive further agrees that his obligation to execute or cause to be executed, when it is in his power to do so, any such instrument or papers shall continue after the termination of this Agreement. If Executive is unable because of his mental or physical incapacity or for any other reason to secure his signature to apply for or to pursue any application for any United States or foreign patents or copyright registrations covering Inventions or original works of authorship assigned to DMGI as above, then Executive hereby irrevocably designates and appoints DMGI and its duly authorized officers and agents as his agent and attorney in fact, to act for and in his behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the processing and issuance of letters patent or copyright registrations thereon with the same legal force and effect as if executed by Executive.

6. Compensation and Benefits .

6.1 Base Salary . Beginning on the Effective Date, DMGI shall pay Executive a base salary of two hundred and twenty five thousand dollars ($225,000) per year, adjusted as provided herein (the “ Base Salary ”), payable as earned in accordance with DMGI’s customary payroll practice. On at least an annual basis, the Compensation Committee of the Board of Directors will review Executive’s performance and consider an increase to the then current Base Salary as it deems warranted by individual and corporate performance, market conditions and other factors. No reductions will be made to Executive’s Base Salary unless it is part of a company-wide expense reduction plan authorized by the Board of Directors of DMGI, applying ratably to the base salaries of all senior executives and to the fees earned by Directors; provided , however , that in no event may Executive’s Base Salary be reduced by more than fifteen percent (15%) at any one time or in the aggregate over any twenty-four (24) month period without his consent.

6.2 Additional Benefits . Executive will be eligible to participate in DMGI’s employee benefit plans of general application to DMGI’s senior executives in effect from time to time, as amended, including without limitation, those plans covering pension and profit sharing, executive perquisites, stock purchases, and, beginning as of March 1, 2008, those plans covering life, health, and dental insurance in accordance with the rules established for

individual participation in any such plan and applicable law. Once Executive is eligible for health and dental insurance coverage hereunder, Executive’s spouse and dependents shall also be eligible for such coverage in accordance with the terms of DMGI’s policies and plans and the contracts with third party providers. In addition, beginning on the Effective Date, Executive will receive such other benefits, including holidays and sick leave, as DMGI generally provides to its senior executives.

6.3 Incentive Bonus Plan . For 2008 and all subsequent years during the Term, subject to the terms of DMGI’s management incentive bonus plan, as amended from time to time (the “ Bonus Plan ”), Executive will be eligible to earn cash bonuses on an annual basis, payable as determined under the Bonus Plan, but not until such time as the Compensation Committee of the Board of Directors of DMGI determines the targets, milestones, performance objectives and measurement criteria to be met each fiscal year and approves the payment of specific cash bonuses after the end of each fiscal year based upon the objective calculations and discretionary judgments as called for in the Bonus Plan. For 2008, Executive shall be entitled to receive a discretionary cash bonus in an amount and in accordance with the parameters set forth on Schedule A attached hereto. Any such 2008 discretionary bonus, if earned, will be payable within two and one half (2 ¹ / 2 ) months following the year in which it vests or is no longer subject to a substantial risk of forfeiture.

6.4 Expenses . Executive shall prepare and submit timely expense reports and DMGI will reimburse Executive for all reasonable and necessary travel and other expenses incurred by Executive in connection with DMGI’s business, provided that such expenses are in accordance with DMGI’s applicable expense reporting and reimbursement policy and are properly documented and accounted for in accordance with the requirements of the Internal Revenue Service.

6.5 Vacation . Executive will be entitled to paid vacation as set forth in DMGI’s policies and/or employee manual (as they may be applicable to DMGI’s executive officers and key employees), as approved by the Board of Directors.

6.6 Equity Incentive Awards . On the Effective Date, Executive will receive options to purchase 33,333 shares of DMGI’s Common Stock (“Common Stock”) and 33,333 restricted shares of Common Stock, with such options and shares being granted and awarded pursuant to and under the terms and conditions of DMGI’s Amended and Restated 2005 Stock Plan (the “ DMGI Stock Plan ”). Such stock options and shares of restricted Common Stock shall vest 33.3% after the first twelve months and then quarterly in eight (8 equal installments of 8.33%) such that they will be fully vested thirty six (36) months from the Effective Date; except that in the event of a Termination Without Cause under Section 7.4 below or Termination for Good Reason under Section 7.5 below, the vesting of the foregoing stock options and shares of restricted Common Stock shall be accelerated by six (6) months. The stock options will expire on the seventh anniversary of the Effective Date.

7.  Term and Termination . This Agreement will commence on the Effective Date and will continue until the earlier of three (3) years after the Effective Date or when terminated pursuant to any one of the following:

7.1 Death . The death of Executive shall immediately terminate this Agreement.

7.2 Disability . If, as a result of Disability, as determined by DMGI, Executive shall have been absent from his full-time duties hereunder or unable to materially fulfill his full-time duties (as determined by DMGI) hereunder for three (3) consecutive months, then thirty (30) days after receiving written notice (which notice may occur on or after the end of

such three (3) month period), DMGI may terminate Executive’s employment hereunder provided Executive is unable to resume his full-time duties at the conclusion of such notice period. Also, Executive may initiate termination of his employment under this Section 7.2 if as a result of Disability his health should become impaired to an extent that makes the continued performance of his duties hereunder hazardous to his physical or mental health, provided that Executive shall have furnished DMGI with a written statement from a qualified doctor to such effect and provided, further, that, at DMGI’s request made within ten (10) days from the date of receipt of such written statement, Executive shall submit on a timely basis to an examination by a qualified doctor selected by DMGI who is acceptable to Executive or Executive’s doctor (such acceptability will not be unreasonably withheld) and such doctor shall have concurred with the conclusion of Executive’s doctor. For purposes of this Agreement, “Disability” means the Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months. In order to receive Disability benefits, Executive must cooperate with DMGI in making such Disability determination, including providing such medical evidence as may reasonably be requested by DMGI or submission to a medical examination(s) by a qualified doctor(s) selected by DMGI. Executive must comply with any such requests within ten (10) days.

7.3 For Cause . DMGI may terminate Executive’s employment under this Agreement for “cause,” which shall be defined herein as follows: (a) Executive’s material breach of this Agreement; (b) Executive’s negligence or insubordination in the performance or nonperformance (continuing for ten (10) days after receipt of written notice from DMGI of the need to cure) of any of Executive’s assigned duties and responsibilities hereunder; (c) Executive’s dishonesty, fraud, misrepresentation or misconduct with respect to the business and affairs of DMGI; (d) Executive’s violation of a material provision of DMGI’s Code of Business Conduct or other written corporate policy; (e) Executive’s violation of any federal, state or local law or regulation applicable to DMGI’s business; (f) Executive’s conviction of any felony crime; (g) Executive entering a plea of nolo contendere to a felony crime or any other crime involving any act of moral turpitude; (h) Executive’s misuse, misappropriation or embezzlement of funds or property belonging to DMGI or any of its subsidiaries and affiliates; or (i) alcohol abuse or drug abuse by Executive which adversely affects the performance of his assigned duties and responsibilities hereunder or compromises the integrity and reputation of DMGI, its employees or its services (any of the foregoing, “ Termination for Cause ”).

7.4 Without Cause . This Agreement may be terminated by DMGI thirty (30) days after the effective date of a written notice sent to Executive stating that DMGI is terminating his employment, without cause, which notice can be given by DMGI at any time after the Effective Date at DMGI’s sole discretion, for any reason or for no reason (“ Termination Without Cause ”).

7.5 For Good Reason . Executive may elect to terminate his employment with DMGI on the effective date of a written notice sent to DMGI from Executive stating that he is terminating employment for “good reason,” which shall be defined herein as follows: (a) Executive’s level of compensation (including Base Salary, fringe benefits and participation in non-discretionary bonus programs under which awards are payable pursuant to objective financial or performance standards) is reduced without his consent; provided, however, that a reduction of Executive’s compensation in accordance with Section 6.1 will not constitute “good reason”; (b) Executive is required to relocate his principal office of employment with DMGI outside of New York, NY without his consent; (c) DMGI materially changes Executive’s role as a critical executive in the finance function as referenced and subject to the terms of the last sentence of Section 1 above; or (d) a breach by DMGI of any material provision of this Agreement which remains uncorrected for thirty (30) days following written notice by Executive of such breach (“ Termination for Good Reason ”).

7.6 Voluntary . This Agreement may be terminated by Executive on the effective date of a written notice sent to DMGI from Executive stating that Executive is electing to terminate his employment with DMGI without “good reason” as defined in Section 7.5 hereof (“ Voluntary Termination ”).

8. Effect of Termination .

8.1 Termination as a Result of Death . In the event of any termination of this Agreement pursuant to Section 7.1 hereof, no severance compensation is due to Executive’s estate; provided , however , that DMGI will continue to pay accrued but unpaid salary, accrued vacation and any other accrued but unpaid benefits and unreimbursed expenses through the last day of the month in which Executive’s death occurs.

8.2 Termination as a Result of Disability . In the event of any termination of this Agreement pursuant to Section 7.2 hereof, DMGI shall continue to pay Executive his Base Salary under Section 6.1 hereof at Executive’s then-current salary and maintain his benefits under Section 6.2 hereof (i) through the remaining term of this Agreement which ends on the third anniversary of the Effective Date, or (ii) for six (6) months, whichever period is shorter. In the event of a disability termination pursuant to Section 7.2 hereof, Executive will not be eligible to receive any ongoing benefits subsequent to the effective date of termination, other than continued participation in any applicable DMGI disability plan, nor will there be any proration of any potential annual incentive bonus under Section 6.3 hereof for the fiscal year in which such termination occurs; provided , however , that DMGI will continue to pay accrued but unpaid salary, accrued vacation and any other accrued but unpaid benefits and unreimbursed expenses through the last day of the month in which Executive’s termination occurs.

8.3 Termination for Cause or Voluntary Termination . In the event of any termination of this Agreement pursuant to Sections 7.3 or 7.6 hereof, DMGI shall pay Executive the compensation and benefits otherwise payable to Executive under Section 6 hereof through the date of termination, except that there will be no proration of any potential annual incentive bonus under Section 6.3 hereof for the fiscal year in which such termination occurs.

8.4 Termination Without Cause or for Good Reason . In the event of any termination of this Agreement pursuant to Sections 7.4 or 7.5 hereof:

(a) DMGI shall continue to pay Executive his Base Salary under Section 6.1 hereof at Executive’s then-current salary and maintain his benefits under Section 6.2 hereof (i) through the remaining term of this Agreement which ends on the third anniversary of the Effective Date, or (ii) for six (6) months, whichever period is shorter. If such benefits contemplated under Section 6.2 hereof cannot be maintained under the provisions and eligibility of the specific plans (see Section 8.6 below), then DMGI shall pay during the post-termination period the cash equivalent of the company’s cost of benefits under any such company plan;

(b) DMGI will pay unreimbursed expenses and accrued vacation through the date of termination pursuant to Sections 6.4 and 6.5 of this Agreement;

(c) For the fiscal year of termination, DMGI shall pay the pro rata portion of the annual incentive bonus otherwise due to Executive pursuant to Section 6.3 hereof, such pro rata bonus amount to be determined at the sole discretion of the Compensation Committee of the Board of Directors based upon the targets, milestones, performance objectives and measurement criteria established for the fiscal year and DMGI’s and Executive’s, as the case may be, actual performance against such targets, milestones, performance objectives and measurement criteria. Notwithstanding the forgoing, in the event of termination of this Agreement pursuant to Section 7.5, this subsection (c) will not be applicable unless DMGI determines, in its reasonable judgment, that the Executive’s termination meets the requirements for Good Reason as set forth in Section 7.5.

(d) The vesting of the Restricted Stock Award Agreement and the Stock Option Agreement that Executive enters into with DMGI for the equity incentive awards set forth in Section 6.6 hereof shall, in the event of a termination of employment pursuant to Sections 7.4 or 7.5 hereof, be accelerated by six (6) months pursuant to the next to last sentence of Section 6.6. Notwithstanding the forgoing, in the event of termination of this Agreement pursuant to Section 7.5, this subsection (d) will not be applicable unless DMGI determines, in its reasonable judgment, that the Executive’s termination meets the requirements for Good Reason as set forth in Section 7.5.

(e) In all cases, post-termination payments to Executive will be reduced for applicable withholding taxes and will be payable on DMGI’s normal payroll dates or bonus payment dates during the periods; provided , however , that if the total amount of the benefits available to Executive under this Section 8.4, either alone or together with other payments which Executive has the right to receive from DMGI, would constitute a “parachute payment” as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the “ Code ”), then DMGI shall pay to Executive at the time of termination an additional amount such that the net amount retained by Executive, after deduction of the excise tax imposed by Section 4999 of the Code and any federal, state and local income tax and excise tax imposed on such additional amount, shall be equal to the amount payable to the Executive under this Section 8.4 as originally determined prior to the deduction of the excise tax. All such amounts payable by DMGI shall be paid within thirty (30) days of the Executive’s separation from service except as provided in Section 8.4(d). In the event of any termination of this Agreement pursuant to Sections 7.4 or 7.5, Executive shall have no duty or obligation whatsoever to seek similar or substitute employment or otherwise mitigate his damages.

(f) If upon termination Executive is a “specified employee” within the meaning of Code section 409A(a)(2)(B)(i) and the regulations promulgated thereunder, then the payments under Sections 8.4(a) and (c) will not begin sooner than the date that is six (6) months following the date of termination. In the event of a delay in payment provided under this Section 8.4(d), DMGI shall, on the first day of the seventh month following such termination, pay Executive in a lump sum all amounts that would have been paid under Section 8.4(a) and (c) through such date if such six-month delay had not occurred; provided, further that all such amounts payable by DMGI under Section 8.4(c) shall be paid by the end of the Executive’s taxable year next following the Executive’s taxable year in which the Executive remits the related taxes or, in the case of a tax audit or litigation addressing the existence or amount of a tax liability, by the end of the Executive’s taxab