There's a third option you didn't mention. Offer the core of the website for free, and charge for premium extras. I think this model can work well, but it has to be implemented properly. The site must be fully usable and enjoyable for free. Additionally, charging for anything that users already get for free is a sure way to piss people off. One example is offering premium users early access to new features. After some time, the rest of the community gets the feature. This ensures that free users don't feel cheated, since they're still getting everything premium users are. In general, you want users to feel like they're getting more for paying, not less for not paying.
Ah, the freemium model. Many sites tried it, among them Reddit. It seems to be very hard to finance a social aggregation website that way - it not impossible to earn some money that way, like Reddit does with it's 'gold' buying / giving, but it does not bring in enough money to subsidize an entire server farm.
Content is key. If reddit had a zynga, where would they be now?
n general, you want users to feel like they're getting more for paying, not less for not paying.
Well said, we've discussed this in the past and that was exactly our take on how it would have to be.