SOCIAL NETWORKING SITES like Facebook, LinkedIn and MySpace have proven to be valuable business tools for Peter Gracey, co-founder of AG Salesworks, a sales and marketing firm in Walpole, Mass.

After he started using Facebook to look for new talent, the average recruitment cost per new employee dropped from $6,000 to just over $1,000. Not only did Gracey save a bundle, but he also believes he found much higher-quality candidates than he would have using a pricey recruitment firm.

For cash-strapped start-ups, social networks offer an inexpensive — and oftentimes free — way to hunt for and recruit employees, drum up new business or conduct market research. And, in many ways, it's a way to help level the playing field between smaller operations and their much larger competition. However, opening the door to these networks can also work against a company. Employee productivity may falter under the temptation of connecting with nonwork friends, for example. And there's always the risk of privacy and security breaches.

"If you're going to use these technologies, you have to have the sober awareness about the upsides and the downsides," says Michael Rappa, a technology management professor at North Carolina State University in Raleigh, N.C. "Companies and people are much more likely to detect the upside early and the downsides late."

Here's how to mitigate the risks of using a social networking site at your business:

Prevent Privacy Leaks

While it may seem evident to you, not every employee knows where to draw the line between what's appropriate to post on a social networking site and what's not. If your company encourages its staff to use these sites for business purposes, say, to network with clients or market to potential customers, then put guidelines in place about how they should behave on the web when representing the company, says Anthony Bradley, a technology analyst at Gartner, a research firm in Stamford, Conn.

These "web participation policies" can be used to caution employees about exposing confidential client and company information or to tell them to avoid offering services or advice that clients would typically pay them for, says Bradley. For instance, if you own a communications firm, inform your staff that giving away free communications advice on social networks — or blogs, for that matter — is prohibited. "If you wouldn't say it at a bar over drinks, don't say it on a blog site," he says.

Protect Your Company's Public Image

One of the irrefutable truths of business is that your customers will talk about you. And if they're not happy, they may even use social networks and other web forums to flambé you. However, "not all criticisms are bad," says N.C. State's Rappa. In fact, keeping an eye on how your company is viewed online can help you pinpoint areas for improvement. "Your users are sometimes your best innovators," he adds.

One way to incite people to offer up constructive comments is to create a MySpace or Facebook page specifically for your company, which can offer useful forums for interacting with customers, says Rappa. By doing so, you create an opportunity to tackle product or service-related issues head on and lead a discussion about your company with current or potential customers and clients. Additionally, if bad news hits, "you'll want to be the first one to know about it," he says. And when you have your own venue for interacting with customers, it provides an opportunity to quickly respond to their questions or concerns.

Promote Productivity

Social networking sites can be fun — and somewhat addictive — causing some employees to spend too much time networking and not enough time working, says George Thomas, a communications consultant at Mercer, a human-resources consulting firm in New York. One way to help prevent productivity drains is to block, or "blacklist," employees from accessing certain web sites or types of media, such as online videos, he says. At AG Salesworks, for example, overall access to the Internet is limited to before 8:30 a.m., between 12 p.m. and 2 p.m., and after 5:30 p.m.

Gartner analyst Bradley is skeptical about the efficacy of such programs, however. "Your employees are going to waste a certain amount of time at work no matter what," he says, adding that a better policy might be to encourage productive behavior, instead. For instance, he suggests giving people incentives such as extra vacation days for completing their work in a timely manner. "If someone gets addicted to Facebook and can't do their job, deal with them. Don't make it a blanket statement."

Other recent Starting Up columns:

Starting Up: Staying Out of Spam Folders
Starting Up: Attracting Luxury Shoppers

("Starting Up," a weekly column written by Diana Ransom for smSmallBiz.com, follows entrepreneurs through the early stages of launching a business. Write to her at dransom@smartmoney.com.)