A corporate jet flight crew deviated from the charted routing departing TEB on the RUUDY SID. It appears the FMS was improperly set to heading mode instead of NAV mode.

Narrative

We departed TEB on the RUUDY 2 SID. We were to climb on a 240 HDG to intercept the 260 DEG course to WENTZ intersection at 1500 MSL. Shortly after departure the aircraft was diverging from the course to the left. We recognized this very quickly and corrected to the right. We were queried by ATC of what departure procedure we were flying. I told the controller the Ruudy departure and that we were correcting back to the right. We crossed WENTZ and climbed to 2000 MSL. After we crossed the TASCA intersection we were given several heading changes and altitude changes as we continued our departure from the NY area. The rest of the flight was uneventful. After reaching our cruise altitude; we reviewed with each other what had occurred. What we determined was that we did not have our flight director in the proper mode. We were in FMS HDG and should have been in FMS NAV. Had 'FMS' been showing at the top of our ADI; we would have followed the proper departure course as the NY Controller had expected us to do. It is a mistake that both of us vow won't happen to us again when departing with an RNAV departure.