But real help is hiding in the comment:
This option does not start the service after installation. To install service and start it, in solution explorer, select 3. Configure Target System > ServicesRegards to Rajeev
Full post exists here.You would get above error if ieproxy.dll is not registered properly. Re register Ieproxy.dll.
C:\Program Files\Internet Explorer>regsvr32 /u ieproxy.dll
C:\Program Files\Internet Explorer>regsvr32 ieproxy.dll
C:\Program Files (x86)\Internet Explorer>regsvr32 /u ieproxy.dll
C:\Program Files (x86)\Internet Explorer>regsvr32 ieproxy.dll