What will happen to my iTunes library if I choose 'Set up as new iPhone'?

So, a week ago, I backed up all my music onto my laptop. There was a problem with my iPhone, so I went to the apple store and got it replaced. There's nothing on my iPhone right now. When I hooked my iPhone up to my laptop, iTunes gives me the choice of setting it up as a new iPhone, or restore from my last backup. I chose to restore from my last backup, and it told me "The backup can't be restored to this iPhone because the software on the iPhone is too old". My only other option was to set it up as a new iPhone - if I do this, will it erase everything in my iTunes library (on my laptop)?

Not your laptop but phone

No. It would not affect your computer stored music.