In truth there is no free version of VMware ESX or ESXi, nor is there any need to upgrade from ESXi to ESX in order to use any of the advanced features of the product.

So then how can you run the ESXi hypervisor for free if there is no free version?  To better understand how this works, you should accept that there is no free version but rather a free license.   The free license, which is limited in features and functionality, can only be applied to the ESXi hypervisor and not the ESX hypervisor.  The actual version of ESXi is identical regardless of which license is used and only differs in the features that are available.

If additional features are desired, such as VMotion or High Availability, then the appropriate license must be purchased and applied to the ESXi installation (see chart below).  This can be done without reinstalling ESXi and all features available in VMware ESX are available in ESXi provided the right license is used.

VMware sells licenses for VI3 in three separate versions – Foundation, Standard, and Enterprise (see below for breakdown of which features are available in each version).  These licenses can be applied to an installation running either VMware ESX or ESXi, and a licensed copy of both ESX and ESXi will have the same features available.

VMware VI3 - How to Buy

That is not to say, however, that VMware ESX and ESXi are identical products.  They differ in their architecture in some important ways so there is value in understanding their differences.  VMware provides a nice KB article that describes these differences.

And finally, in truth nothing is ever really free and this is no exception.  In most circumstances you’ll want to purchase a support contract along with the free license of ESXi to make sure that you can call VMware to troubleshoot any issues that come up.