Hi,
if i see well the old registry key wasn't deleted during tools upgrade. See RUN Key on your VM:
HKEY_LOCAL_MACHINE\SOFTWARE\Microsoft\Windows\CurrentVersion\Run
You will find:
VMware Tools="C:\Program Files\VMware\VMware Tools\VMwareTray.exe"
what is the old key, you should delete it.
The new one is (you must have this key too):
I had the same issue after importing a VM from 4.1 ESX server to ESX 5.1 using OVF. I had activated "upgrade vmware tools" during power cycle and possible was to quick with login and reboot the VM. Repairing VMWare Tools didt solve the problem, after deleting the key "VMware Tools" from RUN key and only keeping "VMware User Process" it was fixed.
Your question about when to upgrade VMWare Tools, your VM can run in every "VM Version" and is using only the features this version offers. VMWare Tools brings device drivers to the VM what matches to the ESX server version and hardware. If your VM is running old VMWare Tools it may working without problems but best practice is to keep the tools near to the ESX version. BUT if you upgrade your "VM-hardware" to the actual version ESX server expected some support in your VM given by VMWare Tools. If they are to old your VM may not start proper or in worst case will be damaged. So be carefully with that and look at your Tools version before upgrading vm-hardware.
Best regards,
Carsten.