It's always best to back things up prior to upgrade.
HgLab was specifically designed to be as simple to upgrade as
possible, so everything should go well. There's one thing to be
aware of, though: HgLab 0.3.x has changed the Home Directory
layout, so upgrades can take quite a while. If you need more
assistance here, please do not hesitate to contact me.
As for Mercurial compatibility, HgLab requires Mercurial 1.6 and
above, both regarding the on-disk format and wire protocol.