Greg Tseng, CEO of the social networking website Tagged, had just landed in Manila, on Saturday, June 6, 2009, to kick off a long-awaited vacation. As soon as he dragged his jet-lagged body up to his hotel room, though, an onslaught of phone calls, e-mails, and text messages from his co-founder, Johann Schleier-Smith, and other Tagged employees began: Something was seriously wrong with the site.

In the 24 hours since Tseng had left his office in San Francisco, thousands of complaints had been filed by users—who claimed that Tagged's new registration process had somehow tricked them into spamming all of the contacts in their e-mail address books. For Tseng, the news was puzzling. The registration process had been extensively tested before going live. Why were problems emerging now? He asked Schleier-Smith to shut the system down and perform another series of quality tests. Meanwhile, Tseng organized an emergency transpacific conference call to get his management team and advisory board up to speed.

The new system had been live for just 72 hours. But Tseng soon discovered that he had not been fast enough in shutting it down.

Coping with crisis was a new experience for Tseng, who had known little but success in his brief time as an entrepreneur. He and Schleier-Smith, friends since junior high school, founded Tagged in 2004, after graduating from Harvard and spending a couple of years studying physics at Stanford. Of course, that was the same year another Harvard kid, Mark Zuckerberg, started his networking site: Facebook. But where Facebook focused on connecting college students, Tseng and Schleier-Smith targeted the teen market. By the end of 2006, Tagged had about 12 million users.

Still, Tagged was far behind Facebook and Myspace. In 2007, Tseng and Schleier-Smith decided to refocus the site. Tagged would help users discover new relationships, rather than simply maintain existing ones, as on Facebook. And it would no longer focus solely on teens. That new direction helped propel the company into the upper tier of social networking sites.

Yet Tagged continued to operate in the shadow of Facebook, which reportedly was adding a million new users every day. Tseng and Schleier-Smith began to tinker with the way Tagged pitched potential customers. First, they made it easier for new users to invite their friends to the site by automatically importing the new users' online address books—a common practice among other social networking sites. Meanwhile, after analyzing Facebook's marketing efforts, Tseng and Schleier-Smith discovered that teasers that promised to show users photos of their friends led to higher conversion rates. So they produced a photo-based come-on of their own.

After three months of testing, the new registration system debuted on June 4. Two days later, as Tseng flew to the Philippines, the flood of complaints began.

Tagged's developers retested the software for bugs but found none. Instead, the problem seemed to be a confusing registration process. The developers had made sure to include multiple steps and confirmations throughout the process, which included clicking a button that would send out invitations from Tagged to everyone in the user's address book. But new users were apparently surprised when their contacts began receiving e-mails encouraging them to check out their photos on Tagged. "I think people accidentally clicked through the warnings," says Tseng. "Then they got angry and frustrated—and blamed us."

Tseng and Schleier-Smith posted an apology on the site's blog and sent another one via e-mail to the some three million users around the world who had signed up during the prior few days. In the e-mail, they also outlined the steps any user could take to deactivate his or her account.

Only a few hundred people jumped ship, so the situation seemed to be under control. Tseng decided to stay in the Philippines as planned. Then Sean Gregory, a writer at Time, posted an online story about his experience with the site that ran on June 11 with the headline, "Tagged: The World's Most Annoying Website." "I got these e-mails from my wife and best friends that made me say, 'What the heck is this? Should I touch this?' " Gregory later said in an interview on Good Morning America. "It made me so angry." In his story, Gregory acknowledged that Tagged had apologized, yet he still advised readers to "avoid the site altogether." Soon, dozens more writers and bloggers piled on. Nonetheless, registrations and opt-outs continued at their normal levels. Again, Tagged seemed to have skirted serious trouble.

But not for long. The company's in-house lawyer received a call and a letter from the office of New York Attorney General Andrew Cuomo on June 12, requesting information about what had happened and Tagged's response. Over the next few weeks, the offices of Texas's attorney general and San Francisco's district attorney called with similar requests, and a private lawyer filed a class action. "That was the start of a very dark period," says Tseng. "I started asking myself, 'Is it all worth it?' " He grew depressed and had difficulty sleeping.

Tseng, Schleier-Smith, and their advisory board began meeting almost daily with their legal team to ponder their options. Certainly, Tagged could wage a legal defense. They also discussed a large-scale PR campaign. "We spend so much time and money on security to protect our users from spammers and hackers, and now we are being accused of being one," Tseng says. "That hurt." But Tseng had long shied from the limelight and wondered if things might not get worse if he started talking now.

The Decision Though Tseng continued to call the incident an innocent mistake, he also decided that Tagged needed to own up to—and pay for—it. In July, he flew to New York City to meet with members of Cuomo's team. "I found myself sitting at a table flanked by seven lawyers and wondered if I had stepped into an episode of The Twilight Zone," says Tseng.

Tseng spent several hours explaining what had happened and what Tagged developers were doing to correct it. Later that month, he flew to Austin for a similar meeting and followed that with a meeting with San Francisco's DA's office.

After those meetings, and another related to the private suit, it was clear everyone involved saw a quick settlement as the best course of action. "We decided that our mission as a company was to help people meet and socialize, not fight lawsuits," says Tseng. After a few months of legal haggling, Tagged settled with New York and Texas; it agreed to change its invitation mechanism and pay fines of $500,000 and $250,000, respectively. Similar settlements followed in February 2010 with the private lawyer and in April 2010 with the city of San Francisco. In total, Tagged agreed to pay $1.4 million in fines.

Throughout it all, Tagged continued to refine its marketing and registration efforts. It also cut ties with advertisers that had been criticized for using annoying banners, loud music, or overly aggressive tactics to sign up users. "We decided to take proactive steps to make our site as trustworthy as possible," says Tseng. Tagged also hired Peter Evers of Natron Communications as its new PR point man. "Tagged has a couple of missteps, not unlike most companies out there," says Evers. "Now, we want to tell the world why the site is one of the most popular in the entire world."

With 100 million users, Tagged now ranks second only to Facebook in terms of the number of visits per user per month. In 2010, revenue hit $32 million. Yet as any Google search of the company's name proves, Tagged will never fully escape the events of June 2009. "In the age of Google, bad press stays forever," says Tseng. "This incident will be a part of Tagged's legacy forever."

The Experts Weigh In

It Was Smart to Own Up

Tagged made the mistake of breaking a social contract with its users. People felt tricked. But everyone makes mistakes, especially a young start-up company. It's easy to see how it happened, given how competitive Tagged's market is. Tseng and Schleier-Smith have done a good job in admitting what they did, though, while also making themselves as transparent as possible. The worst thing they could have done was avoid taking responsibility.

Shannon M. Wilkinson
Founder | Reputation Communications
New York City

Why So Quiet?

Tagged made a big mistake when it went silent during its legal troubles. This happens all the time, because lawyers always advise their clients to keep quiet. But by allowing their critics to hammer away at them, Tseng and Schleier-Smith left the job of storytelling to their opponents. Tseng should have personally gone and visited journalists like Sean Gregory to apologize and explain what the company was doing to fix things for its users. That's not something you can let your PR person do for you.

Lew Phelps
Senior executive | Sitrick and Company
Los Angeles

Get the Users Involved

Waging a war in the courts would have been far more expensive than admitting error and moving on. The last thing you want to do as a company is act like a victim or get into a back-and-forth in the media. What Tagged could have done better, perhaps, would have been to organize its users to help—say, by getting thousands of them to write letters to Andrew Cuomo in support of all the positive things Tagged was doing.

Alex Rampell
Co-founder and CEO | TrialPay
Mountain View, California