Social ads have social consequences. Josh Kopelman, Managing Director of VC firm First Round Capital, recently found that out. Kopelman, a very savvy web 2.0 investor who got in early with StumbleUpon, Odeo, LinkedIn, and others, tried an experiment with Facebook’s controversial SocialAds advertising system. He spent $50 to test the platform, with an advertisement for his VC fund. Specifically he ran an advert targeting Yahoo and Microsoft employees who may be thinking of leaving their jobs to do a startup (see top left image).

Initially the experiment seemed to be working, with reports of Yahoo employees clicking the ads. But in a follow-up post, Kopelman discovered the ads had unintended consequences.

It turned out that the advert was being displayed alongside photos of current Yahoo employees – people who had previously joined the First Round Capital Facebook group. In other words, they were connected in Facebook’s system by being associated with both Yahoo and First Round Capital via its Groups feature. But the way the advert was displayed made it seem like those people were leaving Yahoo, something which Josh Kopelman had no intention of implying. One of the Yahoo people affected wrote to Josh:

“I don’t want my colleagues to think I’m leaving Yahoo, so while your experiment is ongoing, I’ve pulled my “Facebook fandom” for First Round Capital, but I very much remain a fan!”

I don’t think the below image is the specific case noted above, but it’s one example of how Josh’s advert was presented in Facebook. It shows the ad displayed alongside an announcement regarding Upcoming founder Andy Baio leaving Yahoo:

Image from flipzagging

We’ve explored the consequences of Facebook’s social ads many times before on ReadWriteWeb, but the above tale is a great illustration of the issues. Another example that our own Josh Catone thought up: “what happens if say Person X, who is a celebrity of some sort, has a deal endorsing Sports Drink A…. then Sports Drink B takes out an ad and makes it social, and Person X is shown on Facebook endorsing Drink B… which violates his contract with Drink A.”

I’m sure you can think of many other ways social ads can go awry. As one of Kopelman’s commenters, Joe Lazarus, noted: “The entire concept is backwards. Facebook should be using what they know about people’s interests to target ads to THEM, not their friends. Their monetization strategy is doomed in it’s current form.”

I wouldn’t go that far, because I think Facebook’s social ads scheme is ambitious – but eventually they will solve these problems using technology (or a combo of that and opt-in / privacy checks). Facebook rightly sees a huge revenue opportunity in targeting ads socially, it’s just that right now the system stomps all over peoples privacy. No big deal, right? Well yes it is, which is unfortunate for Facebook and anyone who ends up endorsing products without their knowledge.

So the big question is: should Facebook pull its SocialAds platform until it has a solution to these unintended consequences?