Take a 2 GB+ VPS and upgrade it as it grows for maximum performance. Eventually upgrade to a dedicated server if it starts lagging. If you have the choice, go for Xen instead of the more common OpenVZ, it has dedicated resources and swap space, so your processes do not get killed if you go over your memory allocation. Nothing is more annoying than a segfault or an error when encoding a video.
We offer both virtualization methods and can up- and downgrade you the same day at
XenLayer.com and would be happy to set you up.