How do you know when it is a good time to start paying for PR?

Short answer, when you know it will pay off.
Long answer, PR gets the word out people to your site/app. If you haven't proven (on at least a small scale) that you can convert these people to users/customers, then you're wasting your money on a PR agency, and worse, you might be doing harm to your brand. My advice is to build your first sets of users by hand, one by one, listen to them and adapt your product until you sense they have become emotionally connected to it. Then amp up your marketing mix, PR being the first (in my opinion). An initial contract could be $5k per month, with the sole purpose to position the company to publications that achieve a specific goal (fund raising, user growth, brand credibility, etc). Contracts will ramp up to $15k-$25k per month after you've proven the value.

I always say that three things need to be true before paying for PR:

1) That your product is 'ready for an audience' - i.e.: it's gone through at least one preliminary beta period and a strong group of your audience has agreed it has changed the way they do business, live their lives, or their perspective.

2) That you're funded or generating a profit - i.e.: it's responsible to spend money on outside consultants. Until then, a bit of WOM marketing, user acquisition growth hacking (pardon the cliché) or PPC should do the trick.

3) That you know your story inside and out. Why is your startup, product or service a NOW idea? Why are YOU the person to be executing? The media will only truly care about a product or service that has a backstory, a mission, a mandate. Keep in mind that the story might have several variations to please a variety of audiences, but that the story should always be authentic.

If the above three (3) items are true, it may be time to start paying for some PR.

A good PR agency or consultant will help translate your story (your why) into tangible media wins. They'll also extend your productivity consistently and enable you to focus on whats most important at the early stages: your product (or service) and your customer.

Talk to any editor/writer at any place that you'd like to get written up in -- blogger, digital media, or print -- and they'll all tell you they'd rather have a relationship with a founder or C_O than a PR person.

Meaning: *they* will be more receptive to *you* even more so than the PR agency that you spend $5k-$25k/mo on.

Paying a PR agency sometimes gets inches, but rarely makes a difference you can measure on your financial statement. Ask them to track their results and the impact to your business and see what they say. They will take 15 minutes explaining how that's not possible. Correct, that's the point.

So, do something that IS useful -- create genuine relationships with people you want writing about you.

P.S. I do like the idea of an internal social media or even "media relations" person, because it's still internal. Just make sure the CEO/founder does the interviewing.

PR is bedrock spend. I have been quoted in the New York Times as saying that if I only had $5 left I'd give it to the PR agency. It and paid search should be the first places you invest. That said, make sure that you have an agency partner you can work with well, "gets" you and values your business. Early stage companies are often not good fits for large PR firms and vice versa.

When you can afford to be the premier client for a good PR firm otherwise keep it in house. A good PR firm commands a monthly retainer and that doesn't even mean they'll do consistently good work for you.