I also would like to discuss how I would clone this vm since it has a production SQL database running on it. If I clone it to a different Windows name, the databases will still reference the old server name etc.
Well, that is the reason, I had asked to put the cloned VM in a separate vSwitch with no uplinks. This way it will not have any communication with the outside world and your existing db server will continue its operation. You can test the upgrade functionality in the clone, by creating some clients and stimulating some workloads.
. I don't understand how I can simply bypass the license key part of the clone due to Windows licensing.
You might need to do a sysprep More information here.
VMware does provide cloning in running VM.
Other simple option would be that of snapshot. This way you wouldnt have to worry about licensing and all.