Sean Combs founded Bad Boy Records in 1993 after rising from an unpaid internship to an artists and repertoire executive at Uptown Records, where he was fired in 1993 by Andre Harrell. Combs took the role of chief executive officer, while former Orion Pictures marketing manager Kirk Burrowes was named general manager and given a 25 percent stake in the label.^[6] During this period, Burrowes managed the company’s internal business affairs and operational structure.^[7]

Combs brought the Notorious B.I.G., who became the label's flagship artist, to the company. With leverage from his success at Uptown, Combs negotiated a $10-15 million deal with BMG Music's Arista Records, under the then leadership of Clive Davis.^[8][9] The label's first release was "Flava in Ya Ear" by Craig Mack, followed quickly by Mack's debut album, Project Funk da World, in 1994. On the heels of these releases came "Juicy" and Ready to Die, the lead single and debut album from the Notorious B.I.G., released the same year. Mack's album went Gold and Ready to Die multi-platinum. Dominating the charts in 1995, the Notorious B.I.G. became one of the genre's biggest names and Bad Boy's premier star. Also in 1995, the label had platinum releases by Total and Faith Evans. It had a bevy of in-house writer/producers,^[10] including Easy Mo Bee, Chucky Thompson, and D-Dot—each of whom is credited on a bulk of Bad Boy's releases during this time.

The rapid success of Bad Boy and the Notorious B.I.G. raised some tension, especially with the Los Angeles, California-based Death Row Records. For three years leading up to 1995, West Coast hip-hop, dominated by labels such as Death Row, had been preeminent in mainstream rap. Death Row CEO Suge Knight held Combs responsible for the shooting death of his friend Jake Robles, allegedly at the hands of Combs's bodyguard Anthony "Wolf" Jones. The tension heightened when Death Row signed Tupac Shakur, who alleged that Bad Boy, notably the Notorious B.I.G. and Combs, had been complicit in his November 1994 shooting at Quad Recording Studios in Times Square, New York.

After the June 1996 release of 2Pac's "Hit 'Em Up", smearing Bad Boy, tensions escalated. Shakur was shot in Las Vegas, Nevada, on September 7 and died on September 13. Bad Boy issued a statement of condolences. On March 9, 1997, while Bad Boy was preparing the release of the Notorious B.I.G.'s double album Life After Death, he was killed in Los Angeles, California. Their deaths left many to speculate that the coastal hostility had been responsible for their deaths. The police investigations were criticized by public and judicial sources. Both cases remain officially unsolved.

Posthumously, Biggie's Life After Death reached number one on the Billboard 200 chart. Its first two singles, "Hypnotize" and "Mo Money, Mo Problems" also topped the singles charts. The album is one of the highest-selling rap albums ever in the U.S., selling over 10 million copies.

In 1996, Combs began recording his solo debut album. The first single, "Can't Nobody Hold Me Down", peaked at number one on the hip-hop, R&B, and pop charts the following spring, in early 1997. In response to the Notorious B.I.G.'s death, the label rush-released Combs's tribute song, "I'll Be Missing You", which features Biggie's widow, Faith Evans, and Bad Boy's R&B group 112. The single topped the charts for 11 weeks and became the second single from Combs's album, No Way Out, which was released in July 1997. The album debuted at number one on the Billboard 200 chart with over 560,000 copies sold in its first week, and seven million altogether. It features appearances by Mase, the Lox, and Carl Thomas, and introduced Bad Boy signee Black Rob.

Mase, Combs's newest protégé, was thrust into the void the Notorious B.I.G. left. His debut album, Harlem World (1997), went quadruple platinum. Due to the successes of Life After Death, No Way Out, and Harlem World, by the end of 1997 Bad Boy as a label and brand name had hit a commercial peak. It began to promote its latest signing, the hip-hop group the Lox, which had prominently featured on various Bad Boy releases that year.

Bad Boy found success with the Lox. In January 1998, it released the group's debut album, Money, Power & Respect, to commercial success. It debuted within the top three on the Billboard 200 chart and was certified platinum. The album was executive produced by Combs and Deric "D-Dot" Angelettie, and features guest appearances by Combs and Carl Thomas. That year, Combs expanded Bad Boy's roster to genres other than hip-hop and R&B, signing Fuzzbubble as its first rock act.^[11] The group appeared on the rock remix of Puff Daddy's "It's All About the Benjamins" but parted ways with the label before releasing a full-length album.^[12]

In the following years, Bad Boy declined commercially. In 1999, Mase became religious and abruptly retired from the business, leaving a serious dent in the company, especially since his second album had just been released. Bad Boy found some success with Shyne, a young rapper from Brooklyn, who received generally mixed reviews for his deep voice and slow flow—which many considered too reminiscent, and perhaps a ripoff, of the Notorious B.I.G. Combs's later albums failed to generate the same acclaim his debut had.

In an attempt to further market himself, he underwent several name changes, from "Puff Daddy" to "Puffy" to "P. Diddy" to "Diddy" to "Diddy- Dirty Money". But with the split of the group, he returned to "Diddy".

In June 1999, it was reported that Clive Davis and Arista had given Combs a $50 million advance on future earnings in 1998, but Bad Boy only generated around $30 million in 1999.^[13]

In the early 2000s, Bad Boy noticeably floundered. Many of its more popular acts left, while those that stayed saw their album sales dwindle. Despite continually releasing new material and various attempts to build artists of the status of the Notorious B.I.G., few proved as successful as the company hoped. Bad Boy had success in 2000 with Black Rob, a New York City rapper who began associating with Bad Boy in 1996. His album Life Story was released through Bad Boy on March 27, 2000, debuted in the top three on the Billboard 200, and was certified platinum.

On June 20, 2002, it was confirmed that Combs and Bad Boy had parted ways with Arista. Combs walked away with ownership of Bad Boy's catalogue and recording roster.^[14] Around this time, Combs began overseeing the MTV's Making The Band 2, a reality music show about the development of a group act. Making the Band 2's three seasons focused on Combs's new group, Bad Boy's Da Band.